Wednesday's Market Minute: Risk On

The historical movements in markets have contained the phrase “risk-on” as investors are moving assets into equities and out of treasuries. The line has been blurred over the last 10 years as bonds have risen right along the Bull run we have seen in stocks. The appetite for the relative safety of bonds has outpaced the rally in stocks during the last two years as investors search for yield. The global central banks have pushed yields to record lows and more than half of the world’s savings rates will yield a negative return. Central bankers have taken an accommodative stance, and now U.S. markets are expecting a 25 bps rate cut at the July FOMC meeting.

Expectations for a 50 bps cut ramped up to 40% earlier this week as the market tries to force the hand of the Fed. Investors have sent the S&P 500 back to record highs this month with the anticipation of lower interest rates helping push stocks further into another risk-on theme. The problem may be that there is still demand for the safety of treasuries, which may be signaling heightened concerns about near-term risks. But, as history has shown, they can move in high correlation for long stretches. We will see how it plays out, but divergence between equities and treasuries has expanded to precipitous levels that may signal a break at some point.
 

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