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JPMorgan Tells Clients the Surge in Stocks Is Prolonging the Bull Market in Bonds

  • Buoyant equities have retail investors playing catch-up: JPM
  • Fixed-income inflows can’t keep pace with stock appreciation

When it comes to flows into stocks and bonds, forget the great rotation: It’s all about the relentless rebalancing.

“The equity rally is feeding the bond rally, preventing bond markets from selling off in a risk-on environment,” JPMorgan Chase & Co. strategists led by Nikolaos Panigirtzoglou wrote in a note distributed to media on Monday.

Major U.S. equity benchmarks ascended to fresh all-time highs on Tuesday on the back of rising optimism in the economy and encouraging earnings growth from major corporate bellwethers. The yield on 10-year Treasuries traded at 2.32 percent ahead of the Federal Reserve meeting, after surging eight basis points.

Here’s how the dynamic, according to JPMorgan, plays out: While bond fund inflows this year have been almost double those of their equity counterparts, that’s in large part a byproduct of price appreciation in stocks, which has boosted assets under management at those funds at a much quicker pace.

Panigirtzoglou said equity outperformance is forcing retail investors to play catch-up by accumulating more bonds to keep their portfolios from becoming too risky. This feedback loop between risk assets and more conservative fixed-income could explain the failure of longer-term bond yields to rise meaningfully...