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Stocks and Rates: This Time is Different?
March 13 2017 ( From FRED, )
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The Trumpification of Financial Markets (potential tax cuts, deregulation
infrastructure, protectionism theme) since the US Election have been a
quick repricing of stocks and bonds.
In fact, since November 8 2016 (US Election Day) til the close of March 10
2017, the Russell 2000 Index gained +14.2%; quite a statement for a
change at the White House.
The other major impact from the Trumpification of Financial Markets have
been the repricing of inflation expectations. That pushed bond prices
into the abyss (yields up).
For the same period (November 8 2016 to March 10 2017), the US Treasury 10 year yield maturity went from
1.86% to 2.58% and US Corporate Bonds Yield from 3.45% to 3.87%.The IEF ETF (iShares 7-10 Year Treasury Bond ETF) lost for the same period 5.2% price wise and the LQD ETF (iShares iBoxx $ Investment Grade Corporate Bond ETF) lost 3.7%.Such violent financial repricing (Stocks to Bond Market) have been going forward a toll on Equity Markets.
As history suggest and as shown by the first chart below, when we had a quick change in yield (US 10 Year Treasury Yield - Constant Maturity - Percent Change from a Year Ago - Blue Line - Left Scale - Ellipses), stocks have performed poorly in the months following the event (Russell 2000 Index - Red Line - Right Scale - Ellipses). One of the most re-leveraging process from US Corporations since the financial crisis have been to sell bonds to buy back their own shares. The violent shift in bonds price is slowly closing that bad behavior for US Corporations. In fact, the PKW ETF (PowerShares BuyBack Achievers Portfolio) is under performing the SP500 Index since December 9 2016.
But the Main Factor that few market participants realize is that US Corporations ETF have increased their debt by a factor of 1.76 since Q2 2007 (just before the financial crisis started) to Q3 2016 (Second Chart Below - Total Debt Securities in Non Financial Corporations - Millions of US $ - Left Scale - Blue Line). If we compare as a ratio with the GDP (Second Chart Below - Quarterly ratio of Total Non Financial Corporate Debt to Gross Domestic Product - Red Line - Right Scale), from Q2 2007 to Q3 2016, that ratio rose by a factor of 1.36. Simply stated, US Corporations have a lot more debt to GDP now then before the US Financial Crisis started.In Summary we can say that this leverage will come someday haunt us; in fact, This Time is Different.Read Also:
Top-Rated Credit is Poised to Fall
Stocks and Rates: This Time is Different? $BONDS $TLT #Trading #bonds #investing #tlt #rates
Total Debt Securities in Non Financial Corporations - Millions of US $ - Left Scale - Blue Line
Quarterly ratio of Total Non Financial Corporate Debt to Gross Domestic Product - Red Line - Right Scale
US 10 Year Treasury Yield - Constant Maturity - Percent Change from a Year Ago - Blue Line - Left Scale
Russell 2000 Index - Red Line - Right Scale