Quarter-end rebalancing set to favour bonds over stocks By Investing.com

By Samuel Indyk

Investing.com – As we head towards the end of the month and quarter, rebalancing flows from asset management companies are expected to favour bonds over stocks.

Over the quarter, bond prices have tumbled and stocks have rallied, prompting the portfolio mix of asset managers to fall out of sync. Typically, it will be around 40% in bonds and 60% in stocks.

“Given the rally in equities and sharp bond sell-off, quarter-end rebalancing could be large, out of equities into fixed income,” said Bank of America’s Sphia Salim.

The bank forecasts US private pensions will take $88bln of out of stocks and invest into bonds, a “historically significant” amount compared to recent years.  

With just three more trading days to come after today, rebalancing flows are expected to pick up, however, asset managers try to keep quiet about the timing of rebalancing, so as not to caught out by other traders.

“Month and quarter-end rebalances do affect markets,” said BNP Paribas (PA:BNPP) analysts in a research note. They forecast a 1.2% decline in US equities in the final week of Q1 due to the rebalancing efforts. That is based on $50bln-67bln worth of selling.

Although there has been a jump in government yields over the quarter, the majority of cash flowing into the bond market is expected into the corporate debt rather than government bonds.

It is worth noting that not everyone expects downward pressure on the stock market. JPMorgan’s Kolanovic believes certain changes to portfolio management could lessen the impact.

“A lack of these flows, and broad anticipation of ‘month/quarter-end’ effect, could result in the market moving higher near term, all else equal,” JPMorgan’s chief global market strategist said.