Investors flee stocks for better yield as Fed hikes kill 'TINA'

The Federal Reserve's push to hike rates into 2023 has killed a guiding principle of the pandemic stock market rally and is pulling investors away from equities and into higher-yielding, lower-volatility alternatives.

Treasury bond yields of all maturities have soared since the start of the year. The benchmark 10-year yield has climbed 200 basis points since the beginning of the year to 3.7%, its highest level in 11 years. The 2-year yield has climbed over 330 bps to 4.2%, its highest level since 2007. Those increases have coincided with the Fed boosting rates by 300 basis points since March with no sign of slowing down, while stocks have fallen steeply from all-time highs when the year began.

Rattled by the growing risk of a recession, rising interest rates, and a stock market mired in a bear market, investors are pouring hundreds of billions into government debt securities. That has brought an end of sorts to a mindset commonly known as "there is no alternative," or TINA, an equity-focused strategy that flourished during the historic run-up in stocks during 2020 and 2021.

"TINA is clearly over," said Paul Schatz, president of Heritage Capital. "A whole host of investors are and will likely exit equities for a safe 4% rate of return."

Government debt

Government debt is looking particularly attractive after a period of lower yields during a historic bull market for stocks.

"The amount of money flowing into this stuff is crazy," said Patrick Leary, a senior trader with Loop Capital Markets. "Fixed income really makes a lot of sense right now."

Debt securities with relatively shorter maturities have seen steep increases as the Fed has tightened policy, causing inversion throughout the yield curve and pushing the curve to flatten. An inverted yield curve, when short-term interest rates are higher than those of longer-dated bonds, is typically one indicator of a looming recession.

One-month Treasury yields have soared from near-0% at the start of 2022 to 2.73%, while six-month yields are up to 3.87%, 17 bps higher than the yield on the 10-year bond.

In addition, some U.S. real yields, or yields on inflation-protected government bonds, have climbed to their highest levels in over a decade after spending much of the pandemic in negative territory.

Double whammy

"TIAA, or 'there is an alternative,' doesn't have the same ring to it, but it's absolutely the case for investors after more than a decade of stocks being the only game in town," said Matthew Weller, global head of research with FOREX.com and City Index.

The shift in market dynamics has pushed Series I savings bonds into the retail investor spotlight as they have high yields, no volatility and no correlation to stocks, Weller said. The bonds, which track inflation, currently carry an interest rate of 9.62%. Investments in these bonds are generally limited to $10,000 per year, but this may be money that a year ago retail investors would have spent buying stocks.

"The recent surge in bond yields is a double whammy for stocks, making bonds a more compelling alternative investment and raising the cost of capital for the underlying companies," Weller said.

After the Fed's latest 75-basis-point rate hike, the S&P 500 settled down more than 23% on Sept. 23 from its Jan. 3 high, with all sectors except energy and utilities losing ground on the year.

On Sept. 22, David Kostin, Goldman Sachs' chief equity strategist, lowered the bank's year-end target for the S&P 500 to 3,600 points, from the previous target of 4,300 points, largely due to the Fed raising rates more aggressively than previously anticipated. If the new target proves true, the S&P 500 will end this year down about 25% from the all-time high set Jan. 3.

"The widely expected year-end rally appears to be dead and Wall Street is positioning itself for a rough finish," said Ed Moya, a senior market analyst with OANDA.

The expectations of more stock market downturns will likely lure investors to safer investments in 3- and 6-month Treasury bills, Moya said.

"Those might be attractive until Wall Street is confident stocks have bottomed out," Moya said.