Investors Start to See Post-Stimulus World Approaching
"Plus ca change, plus c'est la meme chose."
-Jean-Baptiste Alphone Karr, "Les Guepes" (1849)
The more things change... Yes, I'm inclined to agree, especially with regards to the historical relationship between stock prices and bond yields. The two have generally traded together, rising during periods of economic growth and falling during periods of contraction. Consider the period from 1998 through 2010, during which the U.S. economy experienced two expansions as well as two recessions:
Then central banks came to the rescue. Fed Chairman Ben Bernanke led from Washington with the help of the bank's current $3.6T balance sheet. He's accompanied by Mario Draghi at the European Central Bank and an equally forthright Shinzo Abe in Japan. Their coordinated monetary expansion has provided all the sugar needed for an equities moonshot, while they vowed to hold global borrowing costs at record lows.
Extending the previous chart through the present illustrates how stocks and bonds have become unglued in the process.
It's worked for a long time, but change is in the air. The 10-year Treasuries yield has risen to 2.86 percent (from 1.60 percent in May) as the Fed debates whether to taper its bond purchases beginning next month. Stock traders have noticed, and the Dow Industrial Average has dropped 400 in three sessions.
Eventually, bond traders will find a level at which they're comfortable owning bonds, absent central bank support. Stock traders too, are finding a new equilibrium. Barclays Strategist Barry Knapp describes this as "a period of adjustment."
On Aug. 15 we outlined the case for buying puts on the SPY, one way to play the ultimate "reunion" between stocks and bonds. Here's another: buy the yield-related exchange-traded fund ProShares UltraShort 20+ Year Treasury, or TBT. It tracks twice the inverse of the daily Barclays long-term bond index. So investors who think rates are rising quickly could buy the TBT. It has already moved to 81 from 60 since May, though a longer-term perspective reveals it may still have plenty of room to run.