Stock investors are watching the dramatic moves in the Treasury market for clues on the fate of one of this year’s most successful plays – the so-called reflation trade that helped power shares of economically sensitive companies higher after nearly a decade of underperformance.
Investors piled in to shares of energy producers, banks and other companies expected to benefit from a powerful economic rebound earlier this year while betting that Treasury yields, which move inversely to prices, would rise.
That trade appears to be tottering now, as worries over slowing growth send yields tumbling to their lowest level in more than four months. While stock markets appear placid, with the S&P 500 hovering near a record high, a rotation beneath the surface has accelerated in recent weeks, as investors move out of economically sensitive names and back in to the big technology and growth stocks that led markets higher for most of the last decade.
“If we do see a further drop in interest rates, if we do get below that 1.3% level in any kind of meaningful way, that is going to confirm that growth over value has returned and it is not just a head fake,” said Matt Maley, chief market strategist at Miller Tabak.