The "bliss trade" behind the stock/bond split
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Aïda Amer/Axios
The stock market and the bond market are telling different stories about the economy: Bonds fear doom, while stocks see boom.
Why it matters: That's a bit confusing for investors and policymakers looking to these markets to make decisions — or for anyone trying to get a read on (waves hands) everything.
The intrigue: Stocks are betting on what former IMF chief economist Gita Gopinath calls the "bliss trade" — a belief that stocks can keep rallying even as bond investors price in more inflation risk.
Zoom in: Central to this thinking is that any real geopolitical shocks will be offset by government spending, Gopinath, now a professor at Harvard University, wrote in the Financial Times.
- That's what happened in the 2022 energy shock — when European governments spent to help cover energy costs for households. Or during the pandemic, when the U.S. government spent trillions of dollars supporting people and companies through the crisis, driving huge amounts of growth.
Zoom out: "It's a belief in the strength of the economy based on the experience of the past several years," she tells Axios. Markets are pricing in the idea that fiscal policy will come to the rescue — even though with debt levels higher, that's not a sure bet.
The big picture: The disconnect between the stock market and other assets has become the story of the war. Oil prices have been moving in a different direction than equities, as Axios has reported.
State of play: A lot of this is about AI. Investors are looking past the risk of the war and pushing stocks to all-time highs on tech optimism and on better-than-expected earnings.
- The S&P 500 is currently on track for a seventh straight week of gains.
- On Thursday, investors pounced on a new AI stock, the chipmaker Cerebras Systems, driving its shares up 68%.
The other side: To be sure, bond investors and stock investors see the world differently.
- Bond investors just want to get paid back, with interest. So they tend to be more conservative, pricing in risks like the energy shock from the Iran war and rising levels of government debt.
- Stock investors tend to be more gung-ho and focused on growth (AI, yeah!), and are willing to put up with more risk and volatility.
The latest: This week, Treasury yields, which move in the opposite direction from their prices, spiraled higher after two blisteringly hot inflation reports.
- Yet stocks hit new all-time highs.
By the numbers: Long-dated bonds are where you really see investors pricing in rising inflation.
- The yield on the 30-year Treasury crossed 5% for the first time since 2007, after there was "middling demand" at an auction this week, Bloomberg reported.
- 🚨 Friday morning yields are moving higher still — with the 10-year at 4.54% and the 30-year at 5.09%.
Yes, but: Investment-grade corporate bonds are seeing strong demand, says Karen Manna, a fixed income strategist and portfolio manager at Federated Hermes.
- There's a comfort in the bond market, she says, when it comes to companies and their fundamentals.
- Whereas with U.S. government bonds, inflation, debt, and deficits are higher, and the trajectory is less known. So investors want more compensation.
Between the lines: "The equity market is completely ignoring the inflation aspect," says Seema Shah, chief global strategist at Principal Asset Management.
- But as the war drags out and the prospect of more shortages increases, that could change.
What to watch: If the stock market does wake up to the risks, what happens to Treasury yields?
- In previous moments of crisis, investors rushed to buy government debt, and that pushed down interest rates, giving the U.S. room to spend.
- This time could be different.
