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Are Stock Traders Actually More Pessimistic Than Bond Traders?

Authored by Kevin Muir via The Macro Tourist blog,

As a former equity guy, it pains me to say that when the bond and equity markets are at odds, it usually pays to go with the bond guys. Let’s face it, the bond guys are better at math, often smarter, and less likely to fall for a story. Therefore I am a little at a loss regarding this next chart, as it appears the stock jockeys are more sanguine about rates than the fixed income crew.

Yesterday the SPDR Utility ETF closed at a new all-time high. With all the excitement regarding the FANG stocks, along with the manic chasing occurring in TSLA and bitcoin, you would figure that sentiment would be bubbling over. Shouldn’t investors be dumping utility stocks like University students returning on Thanksgiving weekend to their old high school sweethearts? Instead, we find investors gobbling up utilities like rates are never going higher.

Between 2013 and 2016, the relationship between the inverted yield of the 30 year US Treasury and the SPDR XLU ETF held fairly tight. Yet since the Trump election, it has completely broken down.

Obviously, the correlation need not continue, and the two assets might simply head their own merry way.

But what if this divergence is due to recouple? Although I am a long term bond bear, it certainly feels like fixed income is itching to rally.

The Fed keeps tightening and flattening the yield curve.

They seem intent on removing accommodation until something breaks. Ultimately, if they continue to tighten too aggressively, it will be extremely bond friendly.

An argument could certainly be made that the mad scramble into stocks is sending all sectors higher, and utilities are just being dragged along for the ride. Yet I can’t help but notice that many other sectors closed at one month lows yesterday.

Could it be utility stocks smell the coming economic slowdown ahead of the bond market? I am not sure, but if the economy does roll over, it will be a rare occasion when the stock traders were the more pessimistic bunch. Hey, there is a first for everything, including having the stock guys getting it more right than the bond traders.

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