Stocks Versus Bonds: Why Not Bet on Both?

By: Dhara Ranasinghe

So much for all the talk about a 'great rotation' out of bond markets into equities this year, analysts now say the best strategy may be to keep hold of both types of assets given mixed signals for the world economy.

"Isn't it interesting that people were talking about deserting the bond market because of a possible end to QE (quantitative easing), and the bond market is where it's performing, believe it or not, right now," said Yu-Dee Chang, chief advisor at ACE Investment Strategists. "Rates remain low, thus bonds are doing well."

Benchmark 10-year Treasury yields hit a four-month low on Wednesday. In the euro zone, 10-year yields are trading at their lowest since last July and Japanese government debt yields are trading at their lowest in about a month.

Given recent softer-than-expected data out of the U.S. and China, expectations for an imminent cut in euro zone interest rates and a clear signal from the Federal Reserve that it's in no rush to end its ultra-loose monetary policy, there's little wonder that the bond market is back in play after playing second fiddle to a booming stock market earlier this year.

(Poll: Should the ECB Cut Rates?)

What is unusual, say analysts, is that those gains come as equity markets globally remain at relatively strong levels. Take a look at the S&P 500 for instance – it closed 1 percent lower overnight but is still close to all-time highs.

"When you think back, at times of uncertainty, which is where we are right now, diversification is the way to go. And right now owning anything of significance really means owning stocks and bonds," Chang told CNBC's "Asia Squawk Box." "You're not really going to diversify into gold, which is still a little too volatile for me. So you want to diversify between stocks and bonds."

Christine Balderas | Photodisc | Getty Images

Stock markets around the world started 2013 on a high note amid optimism about the global growth outlook, sparking talk of a huge sell-off in bonds that would encourage funds to move into equities.

Although optimism about the growth outlook has faded as recent data from the world's big economies disappoint, monetary stimulus from central banks globally continues to support equity markets, analysts said.

(Read More: The Great Rotation May Be Just a Grand Illusion)

The Federal Reserve, which concluded a two-day policy meeting on Wednesday, reaffirmed its commitment to asset purchases until the labor market improves substantially. Japan's central bank meanwhile has embarked on radical monetary easing to kick-start the world's third biggest economy.

Vasu Menon, vice president, wealth management Singapore at OCBC Bank said global equity markets are still reasonably valued.

"We're still positive on equities - there is a lot of liquidity that will support markets," he said, adding: "We are seeing a rotation of sorts, not from bonds to equities but cash to equities."

Strategists say a change in perception about the global economic outlook is a reason why bond markets continue to hold their appeal. The U.S. economy grew by less than expected in the first quarter of the year, while growth in the Chinese economy slowed unexpectedly. Manufacturing surveys this week meanwhile point to sluggish growth in the months ahead.

Art Cashin, UBS Director of Floor Operations at the NYSE, told CNBC's Bob Pisani on Wednesday that the reasons for the resilience in bonds were two-fold.

"We're getting mixed economic data and that has people saying rates are going to stay low or go even lower, so the bond boys are saying maybe the rally has a bit more room," Cashin said.

And the perception that perhaps the unwinding of global monetary stimulus will come later rather than sooner is also why bond markets are unlikely to crash, as some investors have been anticipating for some time.

(Read More: Should Bond Investors Brace for a 1994-Style Crash?)

"I don't think the bond market is going to crash. We have a very broken world economy which will take years to fix, so rates will stay low for a while," said Menon at OCBC Bank.

source

please give me comments thanks