As you can see from this Bloomberg article, the problem now is that bond yields move in the same direction as stocks – which means that volatility in stocks will be extreme once the momentum turns because investors will need to sell stocks to compensate for losses in bonds, just as the bond losses become pronounced! Ouch! The same thesis was in an FT opinion appeared just yesterday - link is
Here are the first two paragraphs:
Covid-19 has brought us to a historic turning point in financial markets. A fundamental investment strategy that has protected institutional and retail investors alike for decades — balancing equity risk by holding high-quality government bonds — has finally run its course. When the Fed lowered short-term rates to zero in response to the pandemic, the last shoe dropped. The implications of this change are huge. For one thing, millions of retail investors have been left largely defenceless, lacking a tried and tested means of diversifying the inevitable risk of holding equities. Similarly, the sophisticated and extremely successful hedge fund strategy known as Risk Parity faces an existential challenge: without meaningfully positive government bond yields, it has been thrust into a harsh environment in which it is unlikely to prosper.
In a nutshell, the argument is that low bond yields have pushed investors into stocks. But if yields rise, overvalued stocks will be sold just as investors experience capital losses in the bond market!! Of course, the junk-bond market is in a far worse situation than the overall Treasury market with “covenant-lite” and leveraged debt obligations verging on the simply catastrophic in a crisis! Conversely, as investors rush out of stocks for the "safety" of bonds, yields simply collapse even further! As the French say, sauve qui peut!
The U.S. Fed Has Stamped
All Over Volatility
For the Fed, dampening down volatility in the financial markets has been key to bringing things back under control. The battle isn’t quite over yet.By