With 10-year yields trading around 4.50% (with the possibility to go higher) – why haven’t equities sharply corrected? It’s a good question. For e.g., on the surface, one might think equities would struggle given the zero risk premium investors are receiving. But that has not been the case. The stock market has withstood the sharp rise in bond yields (for now anyway). However, I believe there is a simple explanation. It’s the amount of liquidity in the system. Liquidity is abundant – evidenced by the very low credit spreads in the market (participants see very little risk). Generally credit spreads widening are your first sign of trouble.
Debt
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The Bond Vigilantes Strike Back
Several weeks ago I suggested investors consider reducing their exposure to 10-year treasuries. At the time, the world’s most important debt security was yielding around 3.80%. They would continue to fall to a near-term low of 3.60%. In this case, the timing was good as these yields have rallied some 60 bps in turn crushing bond prices. For example, EDV and TLT have dropped more than 10%. So why are 10-year yields rising in the face of Fed cuts? There’s a good reason: term premium. Bond owners demand a premium if owning the debt of a fiscally irresponsible government. And this has major implications for investors…
Howard Marks on Asset Allocation
Sometimes I wonder if the ‘cyber ears’ are listening? One day after I shared my thoughts on how investors should prepare their defense – Howard Marks – shared his latest thoughts on asset allocation. His post was the ideal follow-up to my recent post… where I talked about finding the right balance between risk and reward. Marks’ latest missive reminds us that the investment landscape has undergone a dramatic transformation in recent decades – where the popular “60/40” portfolio may not work in the years ahead… and now is the time to think more about defense (vs offense)