All around the world, investors are asking: is this it?
"It" is the arrival of the long-anticipated, so-called "great rotation" out of bonds and into equities. It's the No.1 issue for anyone trying to figure out if the turbulent market moves in recent weeks and months are here to stay or just a flash in the pan.
There is a tentative consensus that US Treasury yields – the global benchmark – reached their lowest point in July of this year. Remembering that the yield on a bond moves lower as the price moves higher, this would represent the end of a bull market that has lasted more than three decades.
Underpinning the moves is a belief that the election of Donald Trump in the US signals a decisive shift from largely exhausted monetary policy, to inflationary and stimulatory fiscal policy. Central bank spending has had its day – now it's the government's turn.
In recent weeks, long positions in investments most attractive in an era of deflation, such as bonds, credit, REITs, utilities, staples, and highly valued growth names such as US tech stocks, have been at times savagely unwound in favour of "inflation assets", such as the banks and cheap companies geared to an upswing in the economic cycle.
Investors are voting with their feet. November was a "watershed month" for fund flows, Bank of America-Merrill Lynch analysts say. The bank's surveys found professional investors over that period yanked money out of bonds and gold at the fastest rate in 3½ years, and shoved cash into equities at their fastest rate in two years.
And this trend "is only just starting", BoA-ML chief investment strategist Michael Hartnett says. He points out that we are barely four weeks into a reversal of a trend that has pushed $US1.5 trillion more into bond funds than equity funds over the past 10 years.
Hartnett is calling the end of "the greatest bull market in bonds ever" on July 10, when 30-year Treasury yields hit 2.088 per cent. This also represents "the greatest inflection point of all time".
"Our trades are all skewed by the expectation that inflation and interest rates will surprise to the upside in 2017, leading to further rotation from entrenched long positions in 'deflation assets' to assets that benefit from higher rates and inflation," Hartnett writes.
Not all are as convinced.
Analysts at hedge fund group Man FRM are more cautious on the "great rotation" theme. They wonder at the market's remarkable flexibility to dump one narrative (Trump bad for equities, good for bonds) to its exact opposite in the space of literally a few hours.
They suggest that what looks like a "great rotation" may in fact be more of an unwinding of some shorter-term bets, noting that the sell-off in bonds seemed to stabilise at the same time as options traders had finished selling their long positions.
In this light, the question is whether the "real money" investors – whether they be pension funds or individual investors – will begin reallocating their longer term capital, which would represent a more structural shift. And there are plenty of reasons to not fully embrace the "great rotation" theme.
"Ask anyone to list the possible sources of uncertainty in financial markets next year and the list in our view is longer than in any year since 2008 (and from a geo-political angle, since much earlier)." And yet measures of risk such as the S&P; 500's volatility index remains quiescent and currency and bond markets "have quickly priced the new regime with a surprising degree of certainty".
Deltec strategist Atul Lele believes there are fundamental underpinnings to support a "great rotation" trade into equities from bonds, albeit one with more of a cyclical element. A pick-up in global industrial production and US retail sales give him confidence the recovery in the world's largest economy is on track.
"Importantly, this outlook is driven by stronger US income growth, not low interest rates, driving higher consumption and housing activity, which will in turn lead to an improvement in the balance of the US and global economy," Lele says.
That stronger US economic growth will provide the long elusive pick-up in earnings growth for listed American firms, supporting the case for equities. At the same time, higher inflation will lift rates and reduce the relative attractiveness of bonds.
"From a cyclical perspective at least, the great rotation from fixed income to equities is about to begin."
The recent bounce in yields represents "the ninth clear opportunity since the early 1980s to declare that the bond bull run is over," Societe Generale currency strategist Kit Juckes says.
While the recent moves have been savage, they are not sufficient to signal a definitive break from the longer-term trend. Juckes reckons the end of the bond bull market isn't properly tested unless US 10-year yields break 3.25 per cent. They were last at 2.39 per cent.
"To do that [reach 3.25 per cent] when debt levels are increasing, the march of labour-saving technology shows no sign of slowing and global labour migration has accelerated as fast as trade growth has faded, seems mad to me," Juckes says.
Juckes does, however, emphasise the cyclical element in the moves, even if the longer structural themes stay intact over coming years.
"While I very doubt we have seen the low in yields, we've probably seen the low for this economic cycle."
In other words, it doesn't need to be a "great" rotation to be a meaningful one.