Three months ago, the global financial markets were at their short-term nadir, but few knew it at the time. Long term bond yields bottomed then as well, which should be no surprise in hindsight. Since that time, the average 10-year swap rate (what a AA-rated bank can borrow at) for the 10 nations that I track (USA, Germany, Japan, Britain, Switzerland, Canada, Australia, New Zealand, Norway, and Sweden) have risen 53 basis points (0.53%). Equity markets have rallied, and implied volatilities and corporate bond spreads have fallen.
The correlated change in the global bond markets is significant, and if it runs another one percent or so, could derail the equity markets. Bond yields would then be fair relative to equity yields, assuming that the current high operating profitability continues, which is not guaranteed, though I think it will persist long enough to embarrass those who say it must mean-revert imminently.
There is a change going on here, and as for my balanced mandates, I think it means that I toss out my long bonds [TLT] for a small loss, and keep my duration short. As for my equities, no action for now, aside from ordinary rebalancing activity. Don’t panic, but be vigilant, and use your ordinary risk control methods.
Full disclosure: long TLT, but not much