Bank of America Corp. has words of comfort for investors in risky assets braving every bond-market blow: Things are slowly getting better.
(Bloomberg) — Bank of America Corp. has words of comfort for investors in risky assets braving every bond-market blow: Things are slowly getting better.
In recent weeks, corporate bonds and stocks are moving to their own beat rather than swinging in lockstep with gyrations in the Treasury market, per strategist Yuri Seliger. That’s a relatively bullish signal on the economic growth that’s feeding risk appetite even as historic swings continue to rock the world’s most important bond market.
“It’s a balancing act,” Seliger said in a phone interview. “And it looks like the balance shifted toward slightly less negative.”
The 20-day positive correlation between US investment-grade spreads and the 10—year Treasury yield has dropped to 21% down from 53% in early September, a BofA analysis shows. Meanwhile, the negative correlation between rates and stocks has moderated to 24%, up from 85% in early August.
Rate volatility has been front and center as investors try to assess where interest rates go from here. Strong retail sales data out this week bolstered the case for higher-for-longer rates, resulting in a sell off in Treasuries, which deepened ahead of an auction of 20-year bonds.
While the yield on the benchmark 10-year government bond has risen by nearly 30 basis points this week — touching a multiyear high Wednesday — US stocks as well as the spread on a Bloomberg index tracking high-grade corporates saw muted moves over the past few sessions.
The weakening correlation suggests that risk assets are becoming slightly more insulated from rate shocks but it’s too soon to tell if this trend can continue.
“This reaction has diminished a little bit recently which is good, but should the sell off in rates accelerate this could change,” Seliger said. “There is a lot of uncertainty on where rates are going.”
–With assistance from Emily Graffeo.
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