Traders on the floor of the New York Stock Exchange.
Pension funds and other major investors should be big bond buyers for the next week as they rebalance their holdings to offset the bond market sell-off in the first quarter.
This could lead to lower bond yields, at least temporarily.
Wells Fargo’s Michael Schumacher estimates corporate retirement funds will have to fill a gap in bond holdings of approximately $ 125 billion, the largest shortfall in about a decade. Schumacher, director of rates at Wells, said not all activity will take place before the end of the quarter, but he expects a purchase price of around $ 25 billion to fill that gap by March 31.
What happens to stocks is less clear. Ordinarily, stocks would be under selling pressure as large investors offset each other again due to the positive performance of the stock market by also reducing their holdings. The S&P 500 is up 4.9% so far this quarter, and the same investors would reduce their holdings as they add to bonds.
But the stock market has been taken hostage by rising interest rates recently, and when yields stabilized, stocks have done better. As yields fell on Monday, stocks rallied, particularly the Nasdaq, which was hardest hit by rising yields.
“This is the tug-of-war that goes on. On the one hand you know that there are stocks to sell because of the equalization, on the other hand the market has been very, very sensitive to returns that are stable to low,” said Julian Emanuel, Head of Equity and Equity Derivatives strategy at BTIG. “That could be one of the catalysts that is causing stocks to break out of the trading space.”
The bond market sell-off was quick. The 10-year government bond yield started the year at 0.93% and peaked at 1.75% last week. On Monday the yield fell to 1.68%. That decline was positive for stocks. The S&P 500 rose 0.7% to 3,940 while the Nasdaq rose 1.2% to 13,377.
The FANG names – Facebook, Amazon, Netflix, and Google parenting alphabet – were all higher on Monday, as was Apple, another tech stock penalized with rising interest rates.
Emanuel said the sale in FANG was overdone and he expects growth stocks to benefit from the quarter-end decline in rates.
“We strongly believe that despite the fact that we believe that value versus growth will work long-term and short-term, the uptrend will definitely be led by a moderation in the decline in bond yields leading to outperformance in large-cap technologies Leads. Specially FANG, “he said.
Emanuel said the stock market may indeed be at a tipping point.
“We believe the market will announce its intentions by early April,” he said. “Whether it’s a broad uptrend led by the laggards with participating financials, or whether this whole idea, even if bond yields behave in such a way that the bloom for cyclical value trading doesn’t rise in the short term,” he said. “… it could be a significant move on the order of 10% one way or another.”
Schumacher said the activity should lower yields, at least temporarily. “We should have falling returns and a little stabilization for a couple of weeks, and then I would guess they’ll go back to their old tricks and start climbing again,” he said.