Markets need a 30% stock drop or 50% higher U.S. yields.

For every buyer, there’s a seller; for every winner, a loser.

At least, that’s how it usually goes. Yet that hasn’t borne out in the U.S. stock and bond markets. The S&P 500 index is near a record high after gaining about 14 percent since the end of October. Meanwhile global bonds have rallied for five straight months, the longest stretch to start a year since 2003. The benchmark 10-year Treasury yield, at 2.20 percent, is close to its 2017 low.

One of those investor groups has to lose, in the eyes of Bank of America Corp. rates strategist Shyam Rajan. He forecasts the U.S. Treasury will be under-financed by as much as $4.5 trillion over the next five years and have to issue more debt. To find enough demand, interest rates would have to climb 120 basis points from current levels, or equity prices would have to plunge 30 percent, he said this week in a report.

In the meantime, stocks and bonds are rallying in tandem at a time when their hedging power against one another is the strongest in almost a year. Peter Tchir, head of macro strategy at Brean Capital LLC, sees risk parity strategies at play, snapping up Treasuries as a safeguard against holding equities at record-high prices.

That might mean. That investors are more focused on bonds or benefit from low levels of hedging new open long positions.

Source: Bloomberg

Jr Trader Petar Milanov

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