The latest threat to stocks now isn’t any macro risk: It’s rising 2-year Treasury yields, according to some fund managers and strategists. Short-term, relatively risk-free Treasury bonds and funds are back in the spotlight as the 2-year Treasury yield continues to rise. On Wednesday it hit 4.1%, the highest level since 2007. As of Thursday during Asian hours, it rose to 4.124%. “The new headwind for stocks isn’t just about inflation, the potential recession, or even lower earnings estimates, but the ‘competitive threat’ that rising interest rates make yields lower.” of bonds more attractive,” said John Petrides, portfolio manager at Tocqueville Asset Management. CNBC. “For the first time in a long time, the TINA (No Alternative to Equities) market is gone. Short-duration bond yields are now compelling,” he said. Michael Yoshikami, founder of Destination Wealth Management, agreed that bonds had become a “relatively compelling alternative” and could become a “tipping point” for stocks. While Mike Wilson, chief US equity strategist at Morgan Stanley, said bonds offer stability in today’s volatile markets. “While Treasuries are at risk of higher inflation [and the] The Fed reacts to that, they certainly offer a safer investment than equities,” he told CNBC’s “Squawk Box Asia” on Wednesday. “To be honest, I’ve been surprised we haven’t seen a bigger flight to that safety. given the data we’ve seen.” Data from BlackRock, the world’s largest asset manager, shows that investors have been piling into short-dated bond funds. Flows into short-dated bond ETFs are at $8bn so far this month – the biggest short-dated bond inflows since May, BlackRock said on Tuesday. Meanwhile, US-listed Treasury short-term ETFs have attracted $7bn million in inflows so far in September, six times the volume of inflows last month, BlackRock said.Stocks have struggled, with the S&P 500 down about 4% so far this month. ?So should investors get out of stocks and pile into bonds?Here’s what analysts are saying about how to allocate your portfolio right now.For Tocqueville Asset Management’s Petrides, the traditional 60/40 portfolio is back.This makes that investors put 60% of their ca portfolio in stocks and 40% in bonds. “At current yields, a portfolio’s fixed income allocation can help contribute to expected rates of return and help those looking to earn returns on their portfolio to meet cash flow distributions,” he said. Here’s a look at how Citi Global Wealth Investments has changed its allocations, according to a report on September 17: The bank removed short-dated US Treasuries from its largest underweight allocations and increased its allocation to US Treasury bonds in general. It also reduced its allocation to equities, but remains overweight dividend growth stocks. Citi added that 2-year Treasuries are not the only attractive bond option. “The same goes for short-duration, high-quality spread products such as municipal and corporate bonds, with many trading at taxable equivalent yields close to 5%,” Citi said. “Right now, savers are also sending flows into higher-yielding money pools, as the yields dwarf safer bank deposit rates.” Petrides added that investors should get out of private equity or alternative asset investments and shift their allocations to fixed income. “Private equity is also not liquid. In a market environment like this, and if the economy were to continue on a recessionary path, clients might want more access to liquidity,” he said. What about long-term bonds? Morgan Stanley in a September 19 note said global macro hedge funds were betting on another 50 basis point rise in the 10-year Treasury yield. This could send the S&P 500 to a new year-to-date low of 3,600, the investment bank said. The index closed at 3,789.93 on Wednesday. “If this materializes, we believe the downtrend could become more extreme in the short term and will increase the risk of a market overreaction. We reiterate remain defensive on risk positioning and wait for further signs of capitulation,” the analysts wrote. from Morgan Stanley. Rising rates also mean there is a risk the economy will slow down next year, and long-duration bonds could benefit from this, according to Jim Caron, portfolio manager at Morgan Stanley Investment Management. “Our asset allocation strategy has been a stick approach,” he said in it. “On the one hand, we recommend owning short duration and floating rate assets to manage the risk of rising rates. On the other hand, more traditional total return and core fixed income strategies with longer duration.” Examples of traditional fixed income include multi-sector investment-grade bonds, including corporates, Caron said. BlackRock also said that he thinks longer rates could go higher, given that the US Federal Reserve’s tightening is just “beginning”. But for now, he urged caution with longer-dated bonds. “We ask for patience as we believe we will see more attractive levels to enter longer duration positions in the coming months,” BlackRock said.
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