NEW YORK: US stocks rose towards a new record while government bond yields closed at fresh lows on Friday after a strong US jobs report renewed investors’ faith in the US economy, but failed to convince them that the Federal Reserve would tighten monetary policy aggressively.
Typically, stocks and government bonds move in opposite directions as the former is considered a risk asset and the latter a safe haven. With expectations for ongoing accommodative policy from the Fed amid the nervousness around the UK’s exit from Europe and the global economy, bond yields were falling even as stocks got a boost from data pointing to some strength in the US economy.
“What is increasingly obvious is how much distorted impact these unprecedented policies are having on the rate structure,” said Jim Paulsen, chief investment strategist at Wells Capital Markets.
The S&P 500 on Friday rose 1.5 per cent to 2,129.9, just 0.2 per cent shy of the 2,134.72 high reached in May 2015, representing a rally of 18 per cent from the low touched in January when fears raged of a global recession.
In the bond market, the yield on the 10-year Treasury set a new closing low of 1.36 per cent, surpassing the previous level of 1.39 per cent. The yield on 30-year bonds closed at a low of 2.10 per cent.
“This [has happened] despite the fact that we have had a string of very good economic reports,” Mr Paulsen said. “There is a big disconnect showing up between the rate structure and everything else.”
Payrolls in the US grew by 287,000 last month, 100,000 more than had been forecast by analysts, the Bureau of Labor Statistics said on Friday, alleviating fears that the US was headed for a recession.
What is more, while US Treasuries offer paltry yields for investors seeking safety, they are better than the growing universe of other government bonds which trade with negative rates.
“People are looking at US Treasuries and saying it is one of the most politically and economically stable places in the world and we get a better yield,” said Brad McMillan, chief investment officer at Commonwealth Financial Network.
What has been driving the S&P 500’s march back toward a new high has not been the riskier parts of the stock market, but shares perceived as steady and reliable and that pay dividends.
“The dichotomy there seems to be that a big slice of people’s portfolio is going for safety over yield and at the same time they are trying to search out where they can get some yield in stocks,” said JJ Kinahan, chief strategist at TD Ameritrade.
The utilities and telecommunications services sectors of the S&P 500 are the top performers in the year to date with gains of 20 per cent each.
“That thirst for income is a direct function of the rate environment we are in,” said Russ Koesterich, director of asset allocation for the $45bn BlackRock Global Allocation fund. “People can’t source yield form traditional sources.”
Investors like Michael Underhill, a portfolio manager at RidgeWorth Investments, now talk about “Tina” — there is no alternative.
“You can stay in cash and have 1.5 per cent inflation erode your return, invest in bonds and get 1.2-1.5 per cent or negative yields abroad or invest in dividend-paying stocks and get 3, 4, sometimes 5 per cent,” he said. “That is what the average investor is challenged with in the current market environment.”