Bonds are supposed to be boring. Stocks are supposed to be exciting. This year, the opposite is true.
While U.S. stocks have held remarkably steady in 2015, longer-dated Treasuries have been jumping all over the place, posting some of the biggest back-to-back gains and losses on record as the Federal Reserve talks about raising interest rates and European leaders duke it out over a bailout for Greece.
The trend is wearing thin on some of those bond investors who sought out a traditionally safe place to park their money. They yanked US$327 million from exchange-traded funds focused on this longer-dated debt in the past week alone, and $1.4 billion year-to-date, Bloomberg data show.
“It really is a function of bonds being the center of the storm in terms of investors ultimately being concerned with rising rates,” said Marvin Loh, senior fixed-income strategist at BNY Mellon Global Markets. “We pushed rates so low at the beginning of the year and we possibly overshot.”
In January, investors piled into longer-term Treasuries as they worried about the possibility of deflation and imagined a global economy that failed to regain real momentum anytime soon. The debt maturing in more than 15 years posted a record gain of 8.9 percent for the month, with yields on the notes falling to 2.2 percent compared with a 10-year average of 3.9 percent, Bank of America Merrill Lynch index data show.
Yields on the notes have since risen to 3.1 percent and the debt has generated a 13.6 percent loss. That's equal to an estimated $208 billion that's been wiped out in the $1.2 trillion pool of debt.
What changed? The European Central Bank embarked on a 1.1 trillion euro bond-purchasing program to ignite growth, and the efforts seem to be working. Meanwhile, the U.S. economy is emerging from a first-quarter slump and oil values have rebounded, leading to more concerns about inflation than declining consumer prices.
Take all that turmoil and heartache for investors who weren't positioned for it, and contrast that with the incredibly boring calm that's washed over U.S. stocks. The Standard & Poor's 500 index hasn't posted a gain or loss of 2 percent or more for 126 days, the longest streak since one ending in February 2007, according to data compiled by Bloomberg and Deutsche Bank AG.
As the Fed moves closer to its first rate hike since 2006, it's hard to see how bonds will become much less volatile anytime soon. The question is whether stock investors will take notice and join the ride.
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