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Investors buy Equities and sell Bonds even as interest rates fall

Investors buy Equities and sell Bonds even as interest rates fall

Last Updated: ‎‎‎‎‏‏‎ ‎
January 24, 2023

This week’s update is co-authored with Hui Si Tan (Data Analyst)

Investors have made up their mind

In our previous update, we had mentioned that Investors were waiting and watching as Fed signaled an earlier than expected rate hike. They now seem to have made up their mind.

At the moment, they like Equities much more than Bonds (see chart below).

Bonds sold, even as projected Interest Rates are falling again

After the initial spike last month, 5 year Interest Rate Swaps (which predict average LIBOR rates over next 5 years) have fallen again and are back to the pre-announcement levels (see chart below). However selling of Bonds has continued even as projected future interest rates fall (this is counter-intuitive as usually it is the other way round)

The only rational explanation for this is that there is a dichotomy in the market and the Interest Rate Swap traders are not taking the Fed as seriously as the Bond investors are.

Tech remains strong and Energy loses in Equity Markets

Equity markets are benign. The VIX ‘Fear’ Index has spiked twice in the last month, but the panic has been short lived and the overall equity markets remain at all time highs

Technology remains a strong favorite and is being bought along with Communications, Basic Materials and Industrials. Energy, which was strong last month, has lost out

Conclusion (tl;dr)

  • USD 5 Year Interest Swap Rates and VIX Index have returned to equilibrium seen before the Fed’s announcement
  • Equities are being bought and bonds sold, even though expected future interest rates (as projected by the Swaps) have fallen.

Please note that this newsletter is just a data analysis of actual investor behavior and does not constitute investment advice in any form.