Investment: The competition between stocks and bonds is growing

Fund managers and strategists are rediscovering the bond market. The US bank Goldman Sachs sees potential in government interest-bearing securities for the next twelve months, and the world's largest asset manager Blackrock is upgrading US government bonds. Fund manager Bert Flossbach is also placing more emphasis on bonds again. This is increasingly becoming a threat to the stock markets.

Bonds have seen a notable sell-off in recent weeks. Ten-year US government bonds have temporarily yielded 5.3 percent in the past few days, more than a percentage point higher than at the beginning of the year. German federal bonds with the same term temporarily reached 3.6 percent, even though yields on the bond market have recently fallen slightly again.

For Goldman Sachs, government bonds have become attractive again as yields have risen. The US bank has upgraded government bonds to overweight for the next 12 months, according to an analysis published on Monday.

Although strategists remain cautious in the short term, they also see higher current income and the potential to benefit from weakening inflation. Bonds with a ten-year maturity could therefore develop “from a headwind to a hedge” in portfolios. Both US government bonds and German and British securities are rated as attractive.

Bert Flossbach, founder of the asset manager Flossbach von Storch, finds the current returns on the bond market interesting. In some cases, “an adequate real interest rate could still be obtained even after deducting inflation,” writes Flossbach in a recently published report. Bonds have again been taken into account more strongly in asset allocation.

BlackRock, on the other hand, has just increased US government bonds and given up its years of skepticism. “Yields have moved back toward our long-held view of higher interest rates and we want to lock in some attractive returns,” strategists wrote in an analysis from Blackrock Investment Institute.

This leaves the question of whether market participants are now switching from stocks to bonds on a large scale. Andreas Lipkow from broker CMC Markets sees this danger. Investors' calculations are changing increasingly, he says. High bond yields offer attractive returns, while valuations on the stock market are under pressure. “If inflationary pressure eases at the same time, government bonds could benefit even more,” writes Lipkow. “The current competition between stocks and bonds could result in a sustainable capital flow towards the bond market.”

So far, according to the prevailing opinion in the market, robust growth and high profit expectations are supporting the stock market and compensating for higher market interest rates. Even after the price losses suffered on Wednesday, the US leading index S&P 500 is still less than two percent below its all-time high. And Goldman Sachs remains overweight equities over the next 12 months, despite the new view on government bonds.

However, the competition for capital is already visible. BlackRock partly finances its US government bond purchases by downgrading US stocks. According to a survey by Bank of America, around one in five portfolio managers recently stated that they were already switching from stocks to bonds. If the yield on ten-year US government bonds rose to six percent, it would be two thirds.