Metric analysis

Key ETF metric on Wall Street suggests further bond market pain

(Bloomberg) – Even as the raging war between Russia and Ukraine limits risk appetite, US equities still manage to beat long-term Treasuries by the largest margin ever.

Based on two widely watched ETFs on Wall Street, the historic divergence may have some room.

With the outbreak of the Federal Reserve’s inflation fight disk losses on fixed income securities just as bearish buyers are fueling the S&P 500, equities have recently outperformed long-term debt at the fastest pace since the 2020 pandemic rebound.

After generally trading at the same pace earlier this year as the two asset classes fell in tandem, the $411 billion SPDR S&P 500 exchange-traded fund, or SPY, suddenly surged above the ETF. iShares 20+ Year Treasury Bond of nearly $19 billion, known as TLT.

According to Bespoke Investment Group, SPY outperformed TLT in the 10 trading days through Tuesday with the kind of momentum that was last seen in risk reversal points in April 2020, October 2011, January 2009 and October 2002.

In the last four such episodes, a new stock market rally took place the following year, while bonds continued to suffer in the majority of cases.

The recent split in performance is notable given that TLT added over $700 million in new money this week, while SPY saw an outflow of $1.85 billion. Either way, the Bespoke analysis offers a warning to potential buyers in the beat world of long-dated Treasuries.

“Past times when the SPY/TLT ratio rose by a similar amount have resulted in further gains for stocks and more weakness for TLT,” Bespoke analysts wrote in a Tuesday note. “The average gain over the next year was also stronger than the average gain for all periods since 2002.”

Equity investors are betting the global economic recovery will continue despite rising rates and lingering inflation, as sell-side strategists tout companies’ ability to weather pricing pressures and tangled supply chains. The S&P 500 has now recouped half of its losses following a sell-off that began in January.

By contrast, a mass exodus from bonds accelerated after the Fed signaled a steeper path to tighter policy, with Chairman Jerome Powell saying a half-point interest rate hike is possible. at the next central bank meeting. The most dramatic moves have taken root in short-term securities, but longer-term bond rates have also reached pre-pandemic highs in a short time.

Despite recent inflows into TLT, on a time-to-date basis, ETF investors have shown a clear preference for equities, adding $126 billion since January, versus an inflow of around $15 billion for bonds, according to data compiled by Bloomberg Intelligence.

In other words, $8 went to equity funds for every dollar attracted to fixed income – a risk bias not seen since 2016.

“Despite concerns that a hawkish Fed is bad for stocks, history shows stocks have rallied in previous tightening cycles,” said Art Hogan, chief market strategist at National Securities. “We are seeing early signs of this, with the S&P 500 Index rallying in five of the last six sessions. pass these costs on to consumers.

Read more: Bond market fear feels like 2007 again: John Authors

–With the help of Lu Wang.