The value rotation was crushed, “as markets pivot back towards a future state resumption of lower interest rates, flatter curves and disinflationary pressures that we have already operated under for much of the past five, ten years,” Charlie McElligott, a strategist at Nomura Holdings Inc., wrote in a note.
While the dominance of so-called FAANG stocks in U.S. indexes flatters performance, that belies weakness beneath the surface. The equal-weighted S&P 500 underperformed the capitalization-weighted one by more than 2 percentage points on Wednesday, the biggest gap since 2009. Many investors had counted on a stimulus package exceeding $2 trillion from Democrats to benefit a larger swath of stocks, including many battered by the pandemic.
In credit, all the hallmarks of an extended Fed put are emerging. The biggest junk-bond ETF, ticker HYG, saw its largest inflow since June on Wednesday while its peer, JNK, attracted the most since July.
A gauge of investment-grade bonds jumped the most since April. The duration risk of U.S. corporate debt rose to the highest in two months. That has left sensitivity to rate changes once again near a record high — approaching the level reached in summer, when the credit rally started to fade.
That looks like no barrier as long as investors have faith in the Fed. And low-for-longer trades may have further to go. Ten-year Treasury yields could drop to 0.6-0.65% from 0.76% on Thursday, putting flattening pressure on the two- and 10-year portion of the curve, ING strategists led by James Knightley wrote in a note.
“We are still keen on credit and mortgages on Fed support,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham in London. “The system has been backstopped and we think it will be difficult to lose money in that asset class.”
This article was provided by Bloomberg News.