Stocks at a record, but bonds look to break bad first

Thu Jun 5, 2014 1:11am EDT
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By Gertrude Chavez-Dreyfuss and Michael Connor

NEW YORK (Reuters) - U.S. stock and bond markets have risen in tandem all year as investors in each found reasons to support their views: stocks are up on signs the economy is improving, and bonds have gained on expectations for low inflation and relatively slow growth.

The benchmark Standard & Poor's 500 set multiple records in the last few weeks, while the Barclays U.S. Aggregate Bond Index .BCUSA is up 3.3 percent this year, having also hit a record. However, the rally in yields that brought the benchmark 10-year bond to its lowest level in nearly a year last week has some investors saying it may be the bond market that's gone too far.

"It's a bit head-scratching," said Bob Doll, chief equity strategist at Nuveen Asset Management with $120 billion in assets under management. "To me there are signs everywhere the economy is about to get better, and we won't know it until we get second-quarter GDP. Inflation is not going to be high but unlikely to be as low at the end of the year as it was at the start of the year.

"When these other things fade away, my view is we could get a quick move up in rates."

Signs that investors are starting to cotton to this are emerging. Stronger-than-expected U.S. economic data, including on recent inflation, has stemmed some of the enthusiasm for Treasuries. The 10-year yield hit 2.60 percent on Wednesday, highest since mid-May.

And some strategists say the bond market has been unnaturally bolstered by sinking yields in key bond markets in Europe, where the central bank is still ramping up monetary stimulus, as well as by buyers such as pension funds seeking to lock in 2013's equity gains. In Asia, Chinese growth is slowing, while Japan is easing its monetary policy.


A flag is seen outside the New York Stock Exchange in New York, January 4, 2013.  REUTERS/Eric Thayer