Stocks Fell And Bonds Rallied Last Week As Macro Risk Increased

Nearly every corner of fixed income rose last week as investors around the world sought safety in bonds as concerns about the economic outlook cut into the global risk appetite. In a related move, US and foreign stocks fell sharply during an end-of-week selloff on Mar. 22, based on a set of exchange traded funds that track the major asset classes.

One of the factors that convinced investors to embrace a risk-off posture: the yield spread for the 10-year Treasury less the 3-month T-bill turned negative on Friday for the first time since 2007. The return of an inverted yield curve is widely seen as an early warning that US recession risk is elevated.

Chicago Federal Reserve President Charles Evans, speaking at an investment conference in Hong Kong on Monday, downplayed the risk that a US contraction is near. “Whenever the yield curve gets flat, we see growth decelerating and, like I say, I’m looking for almost 2 percent growth this year,” he said. “That sounds kind of low but it’s actually relative to trend of one-and-three-quarters, it’s a good growth rate.”

Nonetheless, investors were in no mood for a wait-and-see stance last week and instead piled into safe havens. Bond markets in the US and around the world rallied, led by foreign inflation-linked fixed-income securities. SPDR FTSE International Government Inflation-Protected Bond (WIP) jumped 1.1% and ended the trading week near it’s highest close in nearly a year.

Last week’s biggest loser: stocks in emerging markets. Vanguard FTSE Emerging Markets (VWO) tumbled 1.7%.

The setback in global equity markets weighed on an ETF-based version of the Global Markets Index (GMI.F). This investable, unmanaged benchmark that holds all the major asset classes (except cash) in market-value weights fell 0.5% last week.

For the one-year trend (based on 252 trading days), US real estate investment trusts continue to lead markets with a strong upside bias.  Vanguard Real Estate (VNQ) posted an impressive 20.8% total return over the past 12 months, as of Friday’s close – far above the one-year results for the other major asset classes.

Meanwhile, emerging market stocks are still posting the biggest one-year setback: VWO is down 10.6% over the past 12 months.

GMI.F’s one-year performance continues to post a fractionally positive one-year total return: 0.8%.

Turning to current drawdown, broadly defined commodities continue to post the deepest peak-to-trough decline for the major asset classes. The iShares S&P GSCI Commodity-Indexed Trust (GSG) has lost more than 50% from its previous peak.

Note that the next-deepest drawdowns at the moment are in emerging markets – for stocks and bonds. VanEck Vectors JP Morgan Emerging Market Local Currency Bond (EMLC) and Vanguard FTSE Emerging Markets (VWO)  are currently suffering with -16.7% and -15.7% peak-to-trough declines, respectively, at last week’s close.

GMI.F’s current drawdown: -3.3%.