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A key ETF metric on Wall Street signals fresh bond-market pain

(Bloomberg) — Even though the Russo-Ukraine war has risk appetite, U.S. stocks still manage to outperform long-term Treasuries by the biggest margin on record.

If the two ETFs widely watched on Wall Street are anything to go by, there could be room for historical divergence to run.

As the Federal Reserve’s inflation battle has hit record losses on fixed income, as plunge buyers power the S&P 500, equities recently pushed up long-term debt at the fastest rate since the 2020 pandemic rebound. left behind.

After typically trading in lockstep earlier this year as the two asset classes fell together, the $411 billion SPDR S&P 500 Exchange-Traded Fund, or SPY, suddenly became nearly $19 billion iShares 20+ Year Treasury. Bonds jumped higher than ETFs, better known as TLTs.

According to Bespoke Investment Group, SPY is outperforming TLT over 10 trading days to Tuesday with momentum that was last seen in the risk-on turn in April 2020, October 2011, January 2009 and October 2002.

In the last four such episodes, there was a fresh stock rally the following year – while the majority of cases continued to jump.

The recent split in performance is notable, as TLT added more than $700 million in fresh money this week, while SPY saw an outflow of $1.85 billion. In any case, the bespoke analysis provides a warning for long to plunge buyers into the beaten-down world of old treasuries.

“The last time the SPY and TLT ratio increased by the same amount, there has been more gains for equities and further weakness for TLT,” analysts at Bespoke wrote in a Tuesday note. “The average profit in the following year has also been stronger than the average profit for all periods since 2002.”

Equity investors are betting that a global economic recovery will continue despite rising rates and persistent inflation, as sell-side strategists point to the potential for companies to face price pressures and poor supply chains. The S&P 500 has now recovered half of its losses from the sell-off that began in January.

Conversely, the mass exodus from bonds has gained momentum after the Fed signaled a harsher path toward tighter policy, with Chairman Jerome Powell saying a half-point interest rate hike is possible at the central bank’s next meeting. Is. The most dramatic moves have taken root in short-dated securities, but rates on longer-dated bonds have also reached pre-pandemic highs in shorter time frames.

Despite the recent inflows in TLT over the year-over-year horizon, ETF investors have shown a clear preference for stocks, adding $126 billion since January, compared to nearly $15 billion inflows for bonds, according to Bloomberg. Data compiled by Intelligence show.

In other words, $8 for every dollar gone into equity funds that attract fixed income — a preference in favor of risk not seen since 2016.

“Despite concerns that a hawkish Fed is bad for equities, history shows that stocks have risen during previous tight cycles,” said Art Hogan, chief market strategist at National Securities. “We are seeing some early signs of this, with the S&P 500 index rallying in five out of the past six sessions. One possible reason that equities are seen as a good hedge against rising prices is because companies are able to cover those costs. can be passed on to consumers.

Read more: Bond-markets are looking like 2007 again: John Auther

– With the help of Lu Wang.

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