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Strange Days Indeed 

Kristina Hooper 

The Upshot 


In the dog days of summer, investors are buying both US stocks and Treasuries. Why the pull toward two asset classes that normally diverge? It could be a simultaneous expression of bullishness and hedge against risk, writes Kristina Hooper.

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Kristina Hooper is the US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

Investors may be flocking to the beach this time of year, but—in an unusual confluence of events—they’re also being driven toward US stocks and Treasuries at the same time.

Stocks were indeed volatile last week, but the release of positive macroeconomic data trumped ongoing geopolitical concerns and stocks posted gains. At the same time, prices on 10-year Treasuries were bid up by investors, which resulted in falling yields. This is the continuation of a trend we’ve seen for several months now.

It reminds me of the chorus of a John Lennon song: “Nobody told me there’d be days like these … strange days indeed.” I can’t help but imagine that’s what many investors are thinking this summer, with the S&P 500 above 1,950 and the yield on the 10-year US Treasury near 2.4%.

Curious Confluence of Events

Five Interpretations of Unusual Events

So what’s driving the high prices for both stocks and bonds? There are different forces at work, but here are five theories—some interrelated—that help explain what’s happening:

US Treasuries have become a yield play The US is on a divergent path from other developed nations when it comes to monetary policy. With yields much lower in countries like Germany, US debt actually looks attractive, especially given the expectations that the US dollar will rise compared with other currencies.
The recovery is stronger in the US than in other countries Recent macroeconomic data and second-quarter earnings were both largely positive, which makes US stocks continue to look attractive. Continued low interest rates are also acting as a tailwind to counter the headwind of stretched valuations. And with the economic recovery stronger in the US than in other regions, particularly Europe, investors interested in equity exposure are coming here.
Investors with short time horizons may be flocking to Treasuries because they can’t wait to recoup potential losses.”
Treasuries are shelter for investors afraid of short-term risks Investors with different time horizons are powering different asset classes. With significant short-term global risks—including geopolitical ones—investors with short time horizons may be flocking to Treasuries because they can’t wait to recoup potential losses. Conversely, investors with longer time horizons who need to meet their savings goals are investing in stocks.
Diversification helps in today’s somewhat schizophrenic environment Fundamentals appear to be improving yet risks are significant, so investors may be buying stocks because of the positive economic data being reported while buying Treasuries as a hedge against risk.
Smaller movements appear bigger during the summer slowdown The August buying activity in both stocks and bonds likely appeared exaggerated due to low trading volume during the summer vacation season. If this continues through September or October, that could be cause for concern—particularly if US Treasury yields continue to fall against a backdrop of improving economic data.

Implications for Investors

Reading the tea leaves, we believe that the yield curve will likely flatten but not invert—meaning short-term rates will probably rise while longer-term yields remain relatively low. Flatter yield curves imply that we won’t see a recession but could see slower long-term economic growth, since lower longer-term yields are a reflection of expectations for lower trend growth compared with pre-global financial crisis levels.

In this environment, we expect US bonds on the shorter end of the curve—rather than stocks—to be the most vulnerable asset class.

All in all, it’s an investment climate that comes with real risks yet offers opportunities as well. It’s critical for investors to be well-diversified, but also to make sure they’re matching their asset allocations with their time horizons. Strange days, indeed, but they don’t have to be bad ones.

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Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.

A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

The Standard & Poor’s 500 Composite Index (S&P 500) is an unmanaged index that is generally representative of the U.S. stock market.

Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index.

Allianz Global Investors Distributors LLC, 1633 Broadway, New York, NY 10019-7585,, 1-800-926-4456.


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