Dec 2, 2020 - Economy & Business

Even bond investors look to be joining the risk-on party

Illustration of bull statue with confetti and party hat.

Illustration: Sarah Grillo/Axios

Long-dated U.S. Treasury yields jumped on Tuesday, as momentum pushed bond investors to sell and join the risk-on party in financial markets.

Why it matters: Bond investors have largely been incredulous about the prospects for U.S. growth and inflation — but recent good news on COVID-19 vaccines, global manufacturing data and U.S. holiday retail sales helped push yields on the 10-year Treasury note up by the most in nearly a month.

By the numbers: Yields on the 10-year jumped by more than 9 basis points to 0.938%, the highest since Nov. 12, and the spread between 2-year and 10-year yields widened to the largest since Nov. 12.

  • Yields on the 10-year are now knocking on the door of 1%, a level not seen since March.
  • Breakeven rates for 10-year Treasury Inflation Protected Securities (TIPS) reached 1.82%, the highest since May 2019.

What we're hearing: Investors are finally starting to take their money out of safe-haven Treasuries and move consistently into equities and some areas of the market that previously had been deemed too risky, Ellis Phifer, market strategist at Raymond James, tells Axios.

  • "Europe and EM have been beaten up a lot and that’s where the money starts going, where people feel they can put a little risk back out there."
  • "It’s hard to get too excited but we did see some rotation that is pretty significant into more risky assets from the bond market."

Watch this space: The Institute of International Finance estimates that emerging market securities attracted around $76.5 billion in November, more than triple the $23.5 billion fund flow in October.

  • "As a result, Q4 2020 is likely to be the strongest quarter for EM inflows since Q1 2013, i.e. since just before the 'taper tantrum,'" IIF economist Jonathan Fortun said in a report.

Don't sleep: More Wall Street analysts are jumping on the bull bandwagon. Barclays released a cadre of late-night notes to clients Tuesday touting their expectations for equity prices to continue higher.

  • "We remain overweight risk assets over core bonds, as investors look through the near-term drag of the winter COVID surge and focus instead on a resilient global economy and a faster return to normalcy in 2021," Barclays analysts said.
  • They project a "drift higher in core fixed income yields, and for emerging markets to do well."

The bottom line: Even with rising COVID-19 diagnoses and continued uncertainty about fiscal stimulus (Senate Majority Leader Mitch McConnell rejected a proposed bipartisan coronavirus stimulus package yesterday), Wall Street looks to be all-in on risk right now.

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