Wall Street’s biggest bond dealers are telling clients to shift from most fixed-income markets into U.S. stocks as deepening concern the Federal Reserve will pare unprecedented stimulus fuels the worst debt losses since 2011.
JPMorgan Chase & Co., the most-active underwriter of corporate bonds since 2007, last week joined Barclays Plc, Bank of America Corp., Morgan Stanley and Goldman Sachs Group Inc. in recommending stocks over most bonds as equity returns outpace company notes by the most since at least 1997. The Bank of America Merrill Lynch U.S. Corporate & High Yield Index’s 0.73% loss this year through June 11 compares with a 15.1% gain for the Standard & Poor’s 500 Index.
Securities from Treasuries to junk bonds are showing their vulnerability to a potential pullback from Fed actions that have pumped more than $2.5 trillion into the financial system since 2008. Debt “remains most tied up with the search for yield” and faces more volatility than equities as interest rates rise, JPMorgan strategists led by Jan Loeys said in a June 7 report.
“We’ve now seen a little bit of a rotation out of bond funds,” said Hans Mikkelsen, head of U.S. investment-grade credit strategy at Bank of America in New York. “You could see a very quick change in asset allocation on the retail side that the institutional side can’t keep up with it.”
Dollar-denominated bonds of companies from the most to least creditworthy plunged 2.2% through June 11 from May 22, when Fed Chairman Ben S. Bernanke told Congress the central bank could slow stimulus efforts during its next few meetings if the economy shows signs of sustained improvement. The S&P 500 lost 1.7% in the same period.
Volatility in Treasuries as measured by Bank of America Merrill Lynch’s MOVE Index has soared 68% to 82.3, from a 2013 low of 48.87 on May 9. The gauge is based on prices of over-the-counter options on Treasuries maturing in two to 30 years. In the equities market, the Chicago Board Options Exchange Volatility Index rose 40% in the period.
The market response to “mere talk” of the Fed slowing its bond purchases provides “an idea of where the vulnerabilities are to an actual reversal in monetary policy,” said the strategists at JPMorgan, which had the top-ranked fixed-income team by Institutional Investor magazine in 2012. “To be overweight equities to broad fixed income is the most obvious implication.”
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