The Bond Market’s Saying The Pandemic’s Not Done Just Yet

The Bond Market’s Saying The Pandemic’s Not Done Just Yet
Andrew Rummer

over 2 years ago2 mins

Mentioned in story

Back in the spring, all talk among investors was of the “reflation” trade and expectations of an imminent return to life as normal following the COVID pandemic.

In anticipation of renewed economic activity – accompanied by a pick-up in inflation – investors sold safe government bonds and rotated out of so-called growth stocks (those with fast-growing income) and into value stocks (those with cheaper valuations). After all, a growing economy can lift all boats – weakening the motivation to pay much extra for future earnings growth.

But in recent weeks – to the surprise of many – investors have decided to reverse course. They’ve been piling back into the safety bonds in the expectation that inflation and economic growth will disappoint as new coronavirus varitants hamper reopening – driving the yield on 10-year US Treasuries below 1.3% on Thursday.

As you can see in the chart above, the period since mid June (shaded in green) has seen Treasury yields (plotted in blue) fall and the Vanguard Growth exchange-traded fund – a benchmark for US growth stocks, plotted in pink – climb. The pattern is a reversal of the early spring (shaded in yellow) when Treasury yields surged in anticipation of inflation and growth stocks fell.

Growth stocks – the likes of carmaker Tesla and exercise equipment firm Peloton – derive their appeal from the promise of huge profits in years to come. So they tend to attract investors when the guaranteed returns from safe assets like Treasuries fall.

Many Finimizers have a large chunk of their portfolio in these kinds of growth stocks. So, perhaps unintuitively, rising concerns about a slow end to the pandemic may well be helping your portfolio at the moment. If you’re heavily into growth and believe these reopening concerns will prove merely temporary, the market may just be giving you a chance to take some profits right now. 

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