Treasuries notch biggest weekly drop since 2016 as rotation hits

Treasuries chalked up their worst week — and small-caps their best — since 2016 as investors extended a sweeping rotation away from the momentum plays and bonds that had been favoured over summer.

The yield on the benchmark 10-year note surged 34 basis points since last Friday to a six-week high of 1.90 per cent, the largest weekly rise since mid-November 2016.

An iShares exchange traded fund tracking US Treasuries fell 2.1 per cent over the past five sessions, putting it its worst weekly performance also since that same November week nearly three years ago.

The yield on the 10-year Treasury rose for an eighth consecutive session, the longest streak since March 2017. (Yields went without a decline for eight straight days in April 2018, but one of these sessions saw yields finish flat.)

The savaging of government bonds comes against the backdrop of a rotation that is seeing investors warm to so-called value names at the expense of defensive plays and growth stocks that enjoyed immense popularity over a rocky few months in the market.

Small-caps, which are regarded as more exposed to the domestic economy, were pummelled over the northern summer as indicators in the bond market flashed their strongest warning of a recession since the financial crisis.

But they have since found their footing, and then some. Up 4.9 per cent since last Friday, the Russell 2000 index of small-cap stocks had its biggest weekly advance since December 2016.

So far this week, investors have tipped a net $2.3bn into the largest exchange traded fund tracking the index, which could see its biggest weekly inflow since late September 2018.

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The S&P 500 is up 1 per cent since last Friday and set for its first three-week winning streak since June.

The three best-performing sectors so far this week are financials, energy and materials, which are all up more than 3 per cent and heading for the best weekly performances since June.

Analysts at JPMorgan noted that one other segment of the share market that could rebound after being hard hit over summer was the small- and mid-cap energy and materials companies. They said these sectors might now experience “unusually high upside” as the extreme market conditions rebalanced.

And that rebalancing is not without a sting for other sectors. The more than 3 per cent drop for real estate is set to be its biggest weekly fall since last December. Utilities — a defensive sector that is often treated as a proxy for bonds — dodged a bullet and managed to squeeze out a weekly gain by the slimmest of margins to extend its weekly winning streak to seven, the longest since the final quarter of 2017.

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The benchmark’s segments continue to tell the story of the rotation into value and away from momentum plays.

An iShares ETF tracking the S&P 500’s value stocks is up 2.5 per cent this week, while one tracking its growth stocks is down 0.4 per cent.

So far this month, that same value ETF is up 4.7 per cent, while the growth ETF is up 1.4 per cent.

Gold, a popular haven, was back below $1,500 an ounce on Friday and facing a weekly decline of 1.2 per cent, its largest since March.

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