Large selling of equities into bonds and big duration extensions (ex Gilts)

Month-end should be very supportive to bonds because equities have risen headlined by a 10% total return in the S&P 500 (producing selling in the rebalance) and index providers may revert to normal rules and produce some very large durations extensions. Remember that last month end, many providers of indices either decided not to drop bonds from the index or did not change the index composition at all. This means that the April month-end will generally be a larger affair. That said, Gilts see a particularly low duration extension of -0.04Y because of lower maturity issuance and lack of bonds dropping below 1y recently. Within the EGB world, duration extensions are very strong this month, with Italian and Spanish bonds benefitting in particular.

Rebalancing versus equities

So far in Mar, the S&P 500 return is +9.9% and the US Bloomberg-Barclays Aggregate index is +1.7%, so that there will be a huge switch from equities to bonds. Assuming $4trn of balanced funds and 60/40 target split, this creates a $79bn shift to equities (97th percentile swing) compared to the 10y average of $5bn shift to bonds according to ITC estimates.

For Europe, the Bloomberg 500 is 4.6% total return in Apr, compared to a 0.15% total return for the Bloomberg-Barclays Euro Agg. Assuming €4trn of balanced funds, a decent €43bn shift from equities to bonds (91st percentile). The FTSE All Share returned 4% MtD and Stg Agg +2.7% implying a modest £1.8bn shift to bonds assuming ~£600bn balanced funds