"Riskless" US Treasury bonds are at their riskiest relative to "risky" stocks since the summer of 2013's Taper Tantrum… and at the same time, bonds are 'cheapest' to stocks in over a year…
US Treasury bond risk is at its highest in 9 months as US equity risk hovers back near 2-month lows pushing the relative risk to its highest since Aug 2013…
In June 2011, July 2013, and July 2015, we saw the same spikes in bond risk vs equity risk… and each time, stocks collapse and stock vol surged very soon after.
And at the same time bonds are the 'cheapest' to stocks since Nov 2015 (before the last Fed rate hike)…
We are reminded of what SocGen said just a few years ago,
The bond investor could have bought bonds 90% of the months since 1950 and avoided having a 20% drawdown or more, whilst the equity investor could have only invested in 40% of months to avoid such losses.
Extreme drawdown of 40% or more, even on a real basis, is almost unheard of in the bond market, but seen 17% of the time in equities. Yes bonds at around 2% offer miserable returns, but equities will always offer a higher probability of major losses and until we have an investor base that is able to take such losses, low yields and a systematic preference for bonds is likely to be with us for a while. Risk capital will also be in short supply – if you have it, better use it wisely.
As Boomers head into an uncertain retirement, we wonder whether this type of 'realistic' analysis will trickle-down to investor expectations and 401(k)s as the triangle of risk-reward-regret becomes more and more prescient every day.
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