Monday, 30 November, 2020
Bloomberg-BarclaysIndex Extensions US Tsys 0.16Y, MBS 0.08Y, EGBs 0.04Y, Gilts
Bloomberg-BarclaysIndex Extensions US Tsys 0.16Y, MBS 0.08Y, EGBs 0.04Y, Gilts
minus 0.01Y
Huge shift expected from equities to bonds, combines with large UST extn
If equity markets stay roughly where they are, then the November rally would be largest upside move in a month for European indices over the past 10 years of data and not far off for the US. This
should lead to a tremendous switch by indexed/balanced funds into the debt market. While the relative importance of the equity-bond switch is larger for Europe, the UST market is projected to
see a very strong month-end index extension.
Bonds in general and longer dated USTs, in particular, should receive strong support over month-end.
Rebalancing versus equities
So far in Nov, the S&P 500 return is 9.6% and the US Bloomberg-Barclays Aggregate index is 0.8%, so that there will be a very large switch from equities to bonds. Assuming $4trn of balanced funds and 60/40 target split, this creates a $84bn shift to equities (98th percentile swing) compared to the 10y average of $8bn shift to bonds according to ITC estimates.
For Europe, the Bloomberg 500 is 14.9% total return in Nov, compared to a +0.2% total return for the Bloomberg-Barclays Euro Agg. Assuming €4trn of balanced funds, there will be the largest switch into equities in over 10 years of €141bn shift from bonds to equities. The FTSE All Share returned 14.9% MtD and Stg Agg -1.0% implying a whopping £23bn shift to equities, the largest in 10 years, assuming ~£600bn balanced funds.
Small duration contraction in Germany (-0.02y) but decent increase in weight (0.12%). France is the main beneficiary this month, with small duration extension of 0.04y but biggest index weight increase of 0.20%. Italy, on the other hand, sees the biggest drop in weight (-0.37%) and the most remarkable duration extension of 0.14y, following the drop of the €15.7bn BTP Nov21 and €18bn CTZ Nov21 from the index. No Remarkable changes for Spain.
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