‘TINA’ keeps stocks and bonds as they please


By Yoruk Bahceli and Tommy Wilkes

LONDON (Reuters) – The toll of this week’s brutal liquidation in government bond markets seems clear: Rising inflation will push central banks into panicked interest rate hikes, wiping out economic growth.

Still, stocks, currencies and corporate bonds send a different picture: stay calm. Maybe even buy more.

Time will tell who is right. What is certain is that many bond investors have been surprised by fears that central banks, despite their transient inflation mantra, will end up tightening policies sooner than expected.

A timid message from the European Central Bank, a hawkish message to Canada and the Reserve Bank of Australia’s reluctance to defend its 0.1% T-bill yield target all helped to ignite a fire under yields short-term debt. Those in Germany and the United States hit their highest level since last March, while Australian bond yields saw their biggest rise in three days since 1996.

(GRAPHIC: Australian bonds – https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnoalopq/Aussie%20bonds.JPG)

Normally, such movements would cause significant disruption in all asset classes.

But instead, they barely listed, as the S&P 500 stock index hit a record high on Thursday. While stocks fell on Friday, losses are relatively moderate, and Lipper data shows that from the week to Wednesday, investors bought stocks at the fastest pace since March.

Currency and equity volatility remains subdued, with Wall Street’s “fear gauge”, the VIX index, just off 2021 lows. In Europe, rate volatility has skyrocketed, while actions remained calm.

(GRAPHIC: European flight – https://fingfx.thomsonreuters.com/gfx/mkt/xmvjolmwnpr/European%20vol.JPG)

Some attribute the upbeat reaction to falling longer-term bond yields, which flattened yield curves and seems to indicate that swift central bank action will eventually reverse inflationary pressures.

And “real” bond yields, corrected for inflation, remain deeply negative: despite a surge on Friday, they remain around -1% and -2% respectively in the United States and in Germany.

“It’s surprising that stocks haven’t reacted more, but with real returns so negative the markets aren’t too worried,” said Charles Diebel, head of fixed income at Mediolanum International Funds.

“If you break down the inflation forward curve, it’s about the short-term pressure on inflation … term.”

Break-even points refer to the difference between nominal and inflation-linked bond yields and are often used as a market indicator of inflation expectations.

Riskier corporate debt markets don’t seem scared either. The risk premiums they pay on top of government bonds remain historically low.

“(Low real rates), I think this has an effect on the markets in the sense that it creates the” TINA “effect: there is no alternative to buy higher yielding securities”, a said Barnaby Martin, head of credit strategy at BofA. in London.


The movements in short-term bonds are also partly due to positioning. Traders caught off guard by rising yields had to abandon their positions, which exacerbated the sell-off and made some prices look exaggerated.

Traders now expect the UK and Canada to raise interest rates by more than 100 basis points over the next 12 months. Even the ultra-dovish European Central Bank is seen hiking twice by October 2022.

(GRAPHIC: Global Money Markets Increase Bets on Central Bank Rate Hike Global Money Markets Increase Bets on Central Bank Rate Hike – https://graphics.reuters.com/GLOBAL-MARKETS/ klvykzkylvg / chart.png)

Chris Iggo at AXA Investment Managers expects the higher rates to tighten financial conditions a bit, but said it would sound like “normalization, in a sense because we’re going on pre-COVID terms.”

“It’s a typical mid-cycle type of economic condition, where inflation has gone up a bit, rates have gone up, growth is starting to slow down, but it’s not yet a recession.”

And if serious growth problems emerge, many remain confident in the “put” of the central bank.

“The real widening (of stocks and corporate spreads) would happen in a recession, not so much rate risk, just because we’ve seen time and time again that if the markets start to struggle over fears of interest rates, central banks are trying to push back again accommodating, ”said Martin of BofA.

But the revaluation of bonds should eventually trickle down more widely, meaning that some pain is inevitable.

“Expect risk crises if central banks respond to inflation – and bond crises if they don’t,” Citi strategist Matt King told clients.

(This story has been reposted to clarify the reference to longer-term returns in paragraph 8)

(Reporting by Yoruk Bahceli, Tommy Wilkes, Sujata Rao and Saikat Chatterjee; editing by Sujata Rao and Catherine Evans)

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