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By Rodrigo Campos
NEW YORK May 2 With U.S. stocks near record
highs and Treasury bond yields near multi-month lows, the
disconnect between equity and debt investors has rarely been as
stark. Over the coming months, the economy is likely to show one
of the groups has bet wrong.
The S&P 500 sits less than one percent below an
all-time high. After a wintry first quarter, stock investors are
betting that economic growth is picking up, as evidenced by
stronger spending figures and business demand. That's boosted
the cyclical stocks which react to rising demand, particularly
"The data are suggesting this may be the year when we turn
the corner," said Quincy Krosby, market strategist at Prudential
Financial in Newark, New Jersey.
"If data continues to gain traction you're going to see
investors turn to more cyclical parts of the market. And I think
that's already started."
Bond investors are reacting to a different story. Yields on
the 10-year note hit a five-month low on Friday and the 30-year
note's yield fell to its lowest since June after the April jobs
report, which showed strong growth in payrolls but no growth in
earnings and a decline in the labor force.
That data points to the conclusion that overall economic
demand will remain tepid and that inflation won't materialize as
the Federal Reserve continues to pull back on monetary stimulus,
"Fixed income investors are slowly waking up to the reality
that as the Fed steps back from quantitative easing, there are
no signs of inflation," wrote Andrew Wilkinson, chief market
analyst at Interactive Brokers in Greenwich, Connecticut, in a
Bonds are also gaining as concern about the Ukraine-Russia
crisis heightens the safe-haven appeal of U.S. debt, while some
corporate pension funds are increasingly shifting to bonds as
they seek to match their holdings to the liabilities they are
going to face.
Still, the rise in equity markets doesn't mean that
investors are as confident about growth stocks as they were in
2013. The strongest sector in 2014 is utilities, which have
gained 14 percent and are generally associated with safety.
Consumer discretionary shares such as Amazon.com are down 4.2
percent, the worst-performing sector so far this year.
This may be changing. Data show that the latest internal
rotation in stocks has seen the energy sector take the lead,
with a 4.2 percent gain over the last month.
Capacity utilization, a measure of how much industrial power
is being put to work, rose last month to its highest in nearly
six years and is expected to have ticked higher in the April
report, while Fed data showed last week that commercial and
industrial loans grew at a steady pace in April.
This makes it entirely possible that the bond market -
generally the more sober-minded of the two markets - may have it
"We believe that the current pricing in the Treasury market
has insufficiently accounted for the potential for an explosion
in GDP growth," said Millan Mulraine, deputy head of U.S.
research and strategy at TD Securities USA in New York in a
(Reporting by Rodrigo Campos; additional reporting by Jennifer
Ablan and Jonathan Spicer. Editing by David Gaffen and John