Bond market could deliver 'Mike Tyson moment' to stocks, strategist warns
Last updated: 11:58 05 Oct 2023 EDT, First published: 11:47 05 Oct 2023 EDT
The bond market is unleashing historic levels of pressure on stocks, potentially delivering a historic "Mike Tyson moment".
This is the catchy take from Saxo Bank's chief investment officer Steen Jacobsen, with his colleagues in the equity strategy team suggesting how investors might think about reacting.
Following the rise in interest rates over the past year and three quarters, bond markets and stocks are still reacting - with a bit of a dislocation in their usual relationship.
In fact, that's an understatement.
Bond yields yesterday hit a 16-year high and longer-dated bond prices, the most sensitive to interest-rate changes, have fallen some 46% since their early pandemic peak in 2020, which is one of the biggest ever declines on record, not far from the 49% drawdown in stocks that followed the dotcom bubble in the early 2000s.
The current pullback in the US Treasury Index has been going on for 39 months and the size is two and a half times bigger than the second largest drawdown since 1972, and seven months longer than the previous record in terms of length, Saxo team noted, underscoring the severity of what is happening.
"In other words, what we are witnessing in bond markets today is unique and because the move being such as outlier it will cause something to break," said Saxo equities chief Peter Garnry.
Knock-on effects from this historic shift include putting downward pressure on equities, or as the heavyweight known as Iron Mike once said, “everyone has a plan until they get punched in the mouth.”
The question is, said Garnry, whether these rapidly rising US long-dated bond yields are the "Mike Tyson moment" of markets.
"It seems the market is trying to establish a new equilibrium in bond yields but the question is whether it can be done without breaking something."
He said investors should take note and "consider reducing risks".
For many investors with a longer time horizon and a less active approach to the market, these are the key things to consider, Garnry said: cash, diversification, defensive and mega caps.
