The stock-market rally last week was a departure from increasingly lockstep moves among equity prices and bond yields, where correlations in 2013 have reached record highs. U.S. equities and bond rates have moved in the same direction 80% of the time this quarter as investors sold fixed-income securities amid signs of an improving economy, compared with an average of 63% of the time since the S&P 500 began tumbling from the October 2007 record, according to data compiled by Bloomberg.
While close moves between yields and stocks increased, bonds have risen with equities since 2009 as the Fed spent more than $2 trillion buying securities. U.S. Treasuries have gained 18%, according to Bank of America Corp. indexes, since the S&P 500 kicked off a 135% rally in March 2009.
Treasury yield declines in the past month came as Cyprus imposed losses on uninsured depositors and Bank of Japan Governor Haruhiko Kuroda said he will double monthly bond buying to 7.5 trillion yen ($80 billion), pushing the Asian nation’s investors to shun their government’s bonds in favor of U.S. Treasuries. The Fed is buying $85 billion a month in bonds.
“The policy goal of weakening the yen has driven investors into other currencies where higher yields are available, including the dollar and euro bond markets,” said Howard Ward, chief investment officer at Rye, New York-based Gamco Investors Inc., which oversees $36.7 billion. “Some of this capital flight out of the yen also finds its way into equity markets.”
Japanese investors bought a net 645 billion yen of foreign equity securities in the week ended March 23, according to Japan’s Ministry of Finance. That’s the highest level since the data began in 2005. Purchases reached 1.61 trillion in March, also a record, the data show.
Stocks have climbed as pessimism among the biggest speculators diminished. A gauge of hedge-fund bullishness measuring the proportion of their holdings that represent wagers on rising stocks climbed to 51.6% last week, up from 47.3 at the end of 2012, according to data compiled by International Strategy & Investment Group in Washington.
Short covering helped drive gains last week. An index of S&P 500 companies with the most bearish bets increased 5.1% during the first four days of last week, increasing more than the equity gauge each day. The basket compiled by Goldman Sachs Group Inc. has rallied 16% in 2013, about four percentage points more than the S&P 500.
A net 57% of global money managers, who together oversee about $578 billion, said they were overweight on equities last month, the highest reading since early 2011, according to a Bank of America Corp. survey released March 19. That’s up from 51% in February. Holdings in U.S. stocks were at their highest level in eight months, it showed.
Stocks climbing as yields declining “is not inconsistent,” Johanna Kyrklund, who helps oversee $345 billion at Schroder Investment Management in London, said in an interview on April 11. “The bond yield fell because we had a slight weakening in the data, and people are buying equities because they are looking for return,” she said. “You don’t need a global recovery for that rally to continue.”
Plunges in Treasury yields matching the decline since mid-March have accompanied weakening equity prices 12 out of 14 times since 2010, according to data compiled by Bloomberg.