Signs of cooling inflation have driven a furious bond rally this month, boosting stocks to records and promising to inject some life into the listless housing market. The sharp rise in bond prices has pushed down the yield on the 10-year U.S. Treasury note by nearly a half percentage point since late May.

In what major ways do stocks differ from bonds?

Stocks vs. bonds. The biggest difference between stocks and bonds is that stocks give you a small portion of a company, whereas bonds let you loan a company or government money .

What happens when a bond rallies?

As rates go down, your bond rallies or is worth more and more . To make a long story short, lower interest rates make bonds you own worth more. In other words, bonds rally with lower rates.

What happens to stocks if the bond market crashes?

Theoretically, bond prices and stock prices have an inverse relationship in the short term. When the stock market crashes, investors often flock to bonds, whereas a bond market crash would typically cause investors to move money into stocks .

Are bonds safer than stocks?

In general, stocks are riskier than bonds , simply due to the fact that they offer no guaranteed returns to the investor, unlike bonds, which offer fairly reliable returns through coupon payments.

Should you buy bonds when interest rates are high?

Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen . Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.

When to move from stocks to bonds?

During a bear market environment, bonds are typically viewed as safe investments. That's because when stock prices fall, bond prices tend to rise. When a bear market goes hand in hand with a recession, it's typical to see bond prices increasing and yields falling just before the recession reaches its deepest point .

Why is everyone buying bonds right now?

But the rise in interest rates has made bonds more attractive than they've been in over a decade. Investors can now earn attractive rates on short-term cash through money market funds, while longer-term bonds present an opportunity to lock in yields in case rates fall.

Why have bonds gone up?

When stocks are on the rise, investors generally move out of bonds and flock to the booming stock market . When the stock market corrects, as it inevitably does, or when severe economic problems ensue, investors seek the safety of bonds. As with any free-market economy, bond prices are affected by supply and demand.

Why did the Treasury bond market crash in 2022 and 2023? Interest rates and the price of bonds have an inverse relationship. As interest rates go up, the market value (price) of bonds declines . When the Federal Reserve raises the federal funds rate, it can cause the bond market to crash.

Why have bond funds dropped so much?

Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up . Inflation can also erode the returns on bonds, as well as taxes or regulatory changes.

Bonds and Stocks Rally, Leaving Greenback to Meander

Marc Chandler,November 22, 2016,0 Comments

Equities are being led by energy and materials, as oil and industrial metals continue to advance. Bond are recovering from their recent slide.

Yesterday was the first session since the US election that the euro rose above the previous day’s highs. It is doing so again today, but the new highs are fought hard. Initial resistance is seen in the $1.0660 area and then $1.0720. The euro’s downtrend does not appear over. One of the key drivers pushing the euro lower is the widening interest rate differentials in the dollar’s favor. The premium the US charges is still rising. Today it stands at a new high of 180 bp. It is up seven basis points on the week, though the euro is up a little more than half a cent. The premium widened by 22 bp last week and nine the week prior. The 10-year premium is hovering around 3.0%. Through various business cycles, the US premium rarely been greater going back to the last 1990s.

The dollar has pulled back against the yen after approaching JPY111.40. It is finding support in the JPY110.30-JPY110.50 band. The US two-year premium is at new highs today near 125 bp. It is up a couple of basis points this week after rising eight basis points last week and 11 the week before. The 10-year premium rose to 230 bp last week, its highest in five years and is consolidating a little below there now.

Similarly, the US two-year premium over the UK is at 93bp. It has not been larger since at least 1992 when the Bloomberg data starts. The premium has risen seven basis points so far this week and 19 the week before. The prior week the premium rose five basis points. Sterling could not maintain yesterday’s upside momentum that faltered just above $1.25 in Asia. Resistance was pegged near $1.2530. Support is seen ahead of \$1.24 as the focus shifts to Hammond’s Autumn Statement that is expected to feature some new infrastructure spending.

Many investors anticipate a deal among oil producers and have rallied oil prices to three-week highs. Our concern is that the most vocal comments suggesting a deal is likely are coming from OPEC countries like Iran and Iraq that seek an exemption from cuts or freezes. Similarly, Russia has expanded its output to post-Soviet Union highs, seemingly anticipating the possibility of a freeze. Moreover, the change ushered in by the US election could, through deregulation and a stronger driver to make the US even less dependent on foreign energy, could see America’s output increase more than previously projected. The January light sweet oil contract appears to have traced out a bottoming pattern that projects another run toward $54, which has stemmed rallies twice earlier this year.

Base metal prices are also higher. Copper is at its highest level in over a year. Zinc and lead are also benefiting from the anticipation of stronger growth and infrastructure spending. More broadly, we note that the CRB Index gapped higher yesterday (and gap take on added significance as it appears on the weekly bar charts as well). This follows a gap higher opening last Tuesday, 15 November. The bullish price action suggests scope for a couple more percentage points of gains near-term.

The MSCI-Asia Pacific Index rose 0.9% in its second days of gains. Led by telecom, energy, and materials, Japan’s Topix rose 0.3% to extend its winning streak into the ninth consecutive session. The Dow Jones Stoxx 600 is up 0.5%, with the common theme being energy and materials. The reprieve from the bond market sell-off has seen utilities recover.

The US reports existing home sales and the Richmond Fed manufacturing survey. Neither are typically market movers. Strong housing starts reported last week do not necessarily translate into existing home sales. They are expected to be little changed, but slightly softer, near the best levels since the crisis. The US auctions $28 bln of five-year notes today. Given that policy expectations are in flux, today’s auction may not go much better than yesterday’s that saw primary dealers stuck with over 50%. Tomorrow the FOMC minutes from the meeting earlier this month will be released. Regardless of the election outcome, the minutes will likely reveal that the Fed was poised to hike rates, with “most participants” seeing a move shortly.

Canada reports October retail sales. If there is a risk, it may lay on the upside of the median 0.6% forecast after a stronger than expected US report. The Canadian dollar is up about 0.8% this week as are the other dollar-bloc currencies (and Swedish krona and sterling). The oil story appears to be trumping the rate differential story for the Canadian dollar. The US two-year premium over Canada is widening a couple more basis points today to 42, which is the most since January. However, the CAD1.3380 offers support for the US dollar. Resistance is seen near CAD1.3450.

Tags: bonds, Emerging Markets, Equities, Stocks

About author

Marc Chandler a prolific writer and speaker, has been covering the global capital markets in one fashion or another for nearly 25 years, working at economic consulting firms and global investment banks and writes great insights, analysis on his website Marc To Market. Chandler ...more

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Equities are being led by energy and materials, as oil and industrial metals continue to advance. Bond are recovering from their recent slide.

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