Barclays sees no bond rally without equity drop, cites Fed policy

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Barclays sees no bond rally without equity drop, cites Fed policy

Barclays (LON: BARC ) has offered a sobering outlook for the bond market, indicating that a sustained rally is unlikely without a significant decline in equities. In a report released on Friday, the bank's analysts argued that the current selloff in bonds is set to continue unless there's a drastic tumble in risk assets.

The analysis highlighted that stocks have become more expensive relative to bonds due to the pronounced selloff. This imbalance suggests that for bonds to stabilize, there would need to be a further downward re-pricing of risk assets. The report pointed out that the Federal Reserve's ongoing quantitative tightening policy, which positions it as a net seller of Treasuries, is a key factor in this dynamic.

Moreover, Barclays noted an increase in the term premium — the extra yield investors require to hold longer-term debt over short-term debt — which has been exacerbated by an expanding deficit leading to increased bond supply. This rising term premium is another headwind for bonds, making it difficult for a rally to materialize without changes in other areas of the market.

The bank's report underscores the interconnectedness of asset classes and suggests that investors may need to brace for continued volatility across markets as adjustments unfold.

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