When Tim Rudderow settles into his office in a small town outside Philadelphia, the hedge-fund manager has a shortcut these days to figure out what’s been happening in the stock market.
He just sizes up the bond market.
“I can come in the morning and look at the bond market and know whether or not momentum is outperforming value,” the chief investment officer for Mount Lucas Management LP with $1.5 billion overall said on the eve of Thanksgiving.
This rule of thumb was on the money hours later as higher yields powered a market-neutral strategy that favors cheap equities over high-flying peers by half a percentage point.
Bond-driven rotations like this have gripped quant and discretionary investors all year. Under the calm surface of the unstoppable global equity rally, interest rates have crowned stock winners and losers with exceptional force for this bull market. And it’s spurring more angst than usual on Wall Street that gyrations in government debt could upend a slew of investing styles in 2020.
The same recession fears that have fueled demand for Treasuries have rocked riskier equity strategies like value and pumped up havens including shares offering muted price swings. At the same time falling interest rates have boosted companies offering steady payouts like real estate and utilities to records.
Funds riding the bond rally in the U.S. and euro area like trend followers and risk parity are on course for some of their best returns this decade -- but could get punished in a protracted Treasury sell-off.
All told the world’s largest stocks that win from low yields are near their most expensive relative to the losers in at least 15 years, according to Societe Generale SA citing their five-year link with Treasuries.
Min-vol stocks have become pricier versus value as bonds surged
The bank’s quant guru Andrew Lapthorne is worried. He warns the outperformance of shares that move along with bonds looks extreme -- making now a good time to take profits on interest-rate positions and bond-proxy stocks.
“The equity investor is buying bond risk, not cash flows,” the SocGen strategist wrote in a note.