Investing.com -- A sharp break in the correlation between equities and yields highlighted mounting concerns over debt sustainability, sending tremors through global markets. Yet amid the turmoil, the Eurozone—especially Germany—emerged as a relative safe haven.
Bond sell-offs were widespread, but investor unease was most visible in markets with weaker fiscal foundations. “Sell America was back in vogue,” Barclays (LON:BARC) strategists led by Emmanuel Cau said in a note, as U.S. equities, treasuries, and the dollar came under simultaneous pressure.
U.K. gilts and Japanese government bonds also dropped, reflecting rising inflation fears and supply concerns.
On the other hand, the Eurozone emerged as a relative haven. While not immune to the global bond market stress, Germany’s solid fiscal position helped it weather the storm.
“Eurozone doesn’t look too bad this time around,” the strategists noted, crediting Germany’s capacity to support its economy and comparatively moderate yield pressures.
France and Italy remain challenged by high deficits and low growth, but overall, the bloc appears less exposed than its peers.
“Our economists see more room for the ECB to cut rates than for the Fed, BOE and BOJ, which may also help to keep a lid on German yields and peripheral spreads,” the report continued.
It also notes that the equity risk premium in the Eurozone remains positive, in contrast to the U.S, and U.K., where equities appear more expensive relative to bonds and thus more vulnerable to rising rates.
The U.S. 10-year yield pushing above 4.5% and the 30-year breaching 5% triggered a reversal in equity market leadership. Defensive sectors outperformed as term premia—not growth expectations—drove yields higher. “
This time, yields are no longer moving up for the right reason,” the strategists warned, pointing to a shift away from economic optimism to fiscal alarm.
Flows data mirrored the nervous sentiment. Equity funds saw $4 billion in outflows, led by emerging markets and the U.S. Fixed income funds attracted $25 billion, their largest weekly gain since 2021. European investment-grade bonds also drew strong interest.
"For now, bond vigilantes are likely to keep equity markets on edge, until they are convinced that the spending cuts are large enough to keep deficits under control, and/or growth is strong enough for earnings to cushion valuations against higher rates," the report states.
In this backdrop, Cau and his team see an opportunity in quality balance sheet stocks, which have lagged even as credit spreads widen.