Can stocks stay aloft with global bond yields crashing?
Here are a few things to watch during the trading day.
The world’s scarcest resource right now is safe yield, and the shortage is getting more extreme. Most German government bonds that mature in less than 10 years now have negative yields - part of some $2 trillion worth of paper with yields below zero.
This is what happens when the European Central Bank begins a trillion-euro bond-buying binge with rates already miniscule.
Yesterday, ECB boss Mario Draghi – unfazed by the protest stunt at his press conference – reaffirmed his plan to keep bidding for paper that yields more than -0.2% - that's minus 0.2%.
This is helping to drag US Treasury yields lower as well, with the 10-year down (^TNX) to 1.9% from 2.24% only five weeks ago.
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The ECB’s idea is to take a lot of very safe assets off the market, so investors must move to somewhat less safe ones like higher-yielding corporate bonds or stocks – while also depressing the euro currency. This is the Bernanke Fed QE game plan of a few years ago, pursued belatedly across the Atlantic.
It’s apparently working, as European stocks race higher. But by one way of looking at it, the fact that Treasury yields have been trending lower even as U.S. stocks have continued to stretch back toward their March highs is a bit perverse. This is a reversal of the pattern in place for a while. Traders this week have begun to ask whether this divergence – strong stocks and strong Treasuries prices together – mean that one or the other must crack to restore the relationship.
Watch the way the S&P 500 (^GSPC) ticks versus the bellwether long-term Treasury ETF, iShares 20+ Year Treasury Bond (TLT). There’s no magic in any one relationship, but for now this is one that might have plenty to tell us about the staying power of the recent stock-market strength.
Contrasting debuts
On to new issues: Two stocks will start trading today after their IPOs priced last night, and they form a neat contrast that tells us plenty about the market mood.
Etsy is an e-commerce platform that just wants to be loved. Vitru is a high-speed trading platform that doesn’t seek the public’s affection but merely asks respect.
Etsy Inc. (ETSY) started selling crafts made by small-time artisans and has a feel-good, do-gooder vibe. It gave wide access to its IPO shares. It’s never turned a profit and doesn’t have a clear path to doing so.
Virtu Financial Inc. (VIRT) is the first pure high-frequency financial trading firm to go public – having delayed its IPO a year ago after Michael Lewis’ “Flash Boys” book on HFT made for a hostile environment for Virtu’s story. Virtu is profitable with boring, rigorous efficiency. The firm’s computer programs beam out up to millions of shares a day, making tight markets in instruments across the globe and earning tiny profits on a bare majority.
The general opinion on each company is telling. Etsy is accepted as a social-commerce story stock, with no earnings support to its valuation - not a great business but one with societal virtues, and in some eyes a sign of a bubble in social-Web companies.
Virtu is unjustly seen as a parasitic sniper, when in fact it’s just a high-tech, high-volume, low-margin middleman playing by today’s market rules. Its stock was priced to value the company at a sizable discount to the average stock, despite its leading market position.
Which would a rational investor prefer to own over the long term?
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