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We started the year by suggesting U.S. high-yield bond spreads were the key variable for investors as a mean of gauging whether assets would begin to flow in to equities. Despite decent returns from the S&P 500, however, corporate bond yields have continued lower, testing the previously unheard-of five per cent level. The alleged Great Rotation remains stuck in neutral.
The U.S. Federal Reserve continues to do everything in its power to push investor assets into equity markets – driving fixed income yields to unattractive levels with its $85-billion (U.S.) per month asset purchase program.
Chairman Bernanke was no doubt cheered initially by the rally in high-yield bonds. It was a sign that the Fed was successfully pushing investors "out on the risk scale," a process that would continue with a strong equity rally that would help spur economic growth and unemployment.
But to date this hasn't happened, at least on the scale the Fed would have hoped (see chart). High-yield bonds continue to attract assets and, according to Bank of America, almost $20-trillion (U.S.) or half of the global sovereign debt market now trades with a yield below one per cent. Equity markets continue to move in fits and starts.
U.S. economic data is now even more important than usual. If it strengthens, the probability of an actual Great Rotation that will shove stocks significantly higher increases.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow