What's next now the bond rally 'has run out of steam'?
It has been hard to comprehend negative yields in Germany, let alone Greece.
Enough is enough and the bond rally has run out of steam. The 30-year bund now pays 0.15%. Not much perhaps, but higher than -0.25% seen over the summer.
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That small move has seen the long bond fall in value by 12% already. Negative yields are being rejected and the implications are far reaching.
That would normally imply there is an economic recovery, or at least a period of stability, and that the deflationary forces are easing.
European quality has more than doubled since the pre-crisis peak in 2007, whereas European value has made no money, including dividends, for 12 years.
The defensive and growth stocks are priced to the hilt, while value opportunities are plentiful. Going back to the 1970s, this gap is the biggest on record.
Downward pressure will come in sectors such as food producers, household goods, healthcare and utilities. These companies tend to have low cyclicality and stable earnings, making them particularly attractive during times of uncertainty.
In past cycles, these have tended to lag the bull market and preserve capital during bear markets, yet this cycle has seen them as market leaders. You have to go back to the late 1960s to see when this last happened.
In contrast, there is value on offer from the sectors that have been shunned. These include banks, oil, autos and retail. Each one has its fill of bear stories, but prices more than reflect this.
The car will not disappear, nor will the banks, shops or our thirst for energy. As capacity falls, these industries will find a new equilibrium.
The other divergence comes at the country level. The UK, Sweden, and Norway have underperformed, along with their currencies.
In contrast, Switzerland has flown, boosted by quality stocks and a superstar currency.
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Politics aside, this has gone too far, and the next decade will see the laggards rule the roost.
Charlie Morris is head of multi-asset at Atlantic House Fund Management
Bull Points
• Value sectors are too cheap
• UK, Sweden and Norway offer good value
Bear Points
• Quality sectors are vulnerable as the bond market turns down
• Switzerland could disappoint
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