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US equities and bonds rally amid investor underexposure

EditorAmbhini Aishwarya
Published 08/11/2023, 11:10
© Reuters.
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The past week saw a significant surge in US equities and bonds, despite investor underexposure, making it one of the most challenging quarters marked by simultaneous selloffs. The "Santa melt-up" seasonal scenario witnessed a renewed market rally, leaving numerous investors susceptible due to their underexposure.

A significant decline in long-term US yields led to a 6% surge in US equity futures within days, marking equities' best week in a year. This was accompanied by 10-year Treasuries' best week since the SVB event. High-grade credit and junk bonds also joined this "everything rally", creating a stark contrast between the robust stock surge and investor underexposure.

The past week proved difficult for the macro universe and long/short investment strategies due to this contrast. However, a resurgence of strong economic data could unsettle this balance and reverse last week's perceived economic "softness". This softness was catalyzed by the Treasury's decision to undershoot coupon increase expectations, which led to a bond rally that supported bullish sentiment across diverse asset classes.

Ironically, this rally in longer-dated bonds and easing financial conditions pose a significant threat to the trading ecosystem. The risk stems from "resilient data," not Federal Reserve Speak, potentially forcing the market to recalibrate future Federal Reserve policy expectations.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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