According to analysts, billions of dollars will flow from stocks to bonds as major investors move money to rebalance their portfolios.
The large drop in bond prices and a rise in stocks in the first three months of the year have confused many investors’ typical portfolio mix of 60 percent equities and 40 percent bonds.
To get back into alignment by the end of the financial quarter, pension funds, insurers and other major investment groups will need to raise bonds. That could put a brake on a market shift that has set the opening months of 2021.
“It should be happening right now,” said Nikolaos Panigirtzoglou, asset research analyst at JPMorgan. The rebalancing could already help explain the stronger bond market performance so far this week, as transfers tend to be concentrated in the last two weeks of the quarter, he added.
Global bonds have recently slumped as a result of a price drop in the US Treasury market, which hiked yields on 10-year bonds by 0.7 percentage points to around 1.6 percent. Meanwhile, the MSCI index of developed market stocks has risen 3.7 percent over that period.
The divergence has raised expectations that the forthcoming realignment will be significant. “Given the rise in equities and the sharp sell-off in bonds, the rebalancing at the end of the quarter could be significant from equities to fixed income,” said Sphia Salim, European interest rate strategist at Bank of America.
BofA estimates that in the US alone, private pensions will have to pull about $ 88 billion from stocks and pump it into bonds, which analysts say was “historically significant” compared to the past three years.
JPMorgan estimates that balanced mutual funds are expected to sell $ 136 billion worth of stock to buy fixed-income securities. Among the storerooms of sovereign wealth, the bank expects Japan’s state pension fund GPIF to shift from $ 1.6 billion to $ 44 billion, while Norway’s giant oil fund would have to move about $ 70 billion to meet its target allocation.
Panigirtzoglou said the rebalancing around the end of March could in itself lead to a 4- to 5-percent decline in equities and an increase in fixed-income securities of about 0.1-0.15 percentage points on the US 10- annual interest. “But these streams won’t be the only game in town,” he said.
BNP Paribas warned earlier in March against expecting a major market correction due to the rebalancing flows. The bank estimated that US stocks fell 1.2 percent in the last week of the quarter based on $ 50-67 billion in sales.
“Month-end and quarter-end rebalances are impacting the markets. However, that impact seems to be greater when stocks have outperformed bonds, ”say BNP analysts.
US private investors are expected to put much of their stimulus funds into the stock market. These checks have already started to land and more are on the way. Inflows could reach $ 170 billion over time, Deutsche Bank said in a report last month. The cash inflow from small traders will counteract movements out of stocks by big managers.
The balanced portfolio has been a mainstay of investment strategy for decades. Conventional wisdom has preferred to place 60 percent of assets in riskier but higher growth stocks, with a 40 percent counterbalance in safer bonds. Balanced mutual funds manage nearly $ 7.5 trillion worldwide, according to JPMorgan. Many other large investors, such as pension funds and insurance companies, are looking for a similar allocation.
These managers must periodically shift assets to maintain their preferred balance, usually around the end of the month or quarter. Major market movements in 2020 led to a significant rebalancing every quarter.
Fund managers tend to keep quiet about the timing of their rebalancing to avoid being led out front by other traders. Panigirtzoglou said he doesn’t think the full effect of this month’s moves is still visible in prices.
Analysts expect most of the cash flowing into bonds will go to corporate debt, but a large minority will enter the sovereign debt markets.