Could we finally see the beginning of the so-called "Great Rotation"?

Up to now, there has been little real sign of the much-vaunted Great Rotation this year, supposedly out of bonds and into stocks & shares. It simply has not happened: judging by data on fund flows in the US and UK for this year, we have seen investors putting new money into BOTH stock and bond funds over the months up to April. 

So no sign thus far of any flight from bonds and into stocks, then. However, today I stumbled across this headline in the Financial Times:

"Bond investors face worst quarter since 1994"

With government bond yields rising sharply given the fears over central bank withdrawal of monetary stimulus, it is true that bond investors have had a rough time since early April, as can be seen from the chart of the UK gilt ETF below, whose price dropped from a peak of 1212p to just 1136p now, losing investors over 6% in the process. Given that UK 10-year government bonds yield 2.4% currently, that is a lot of money to lose in less than three months...

UK Gilt ETF Drops Sharply

Source: Bigcharts.com

Interestingly, a relatively defensive sector like Healthcare is roughly flat over the same period, not only offers a 4%+ dividend yield but also offers the prospect of dividend growth to boot, something that bonds can never offer. 

Which sectors can benefit from rising bond yields?

Historically speaking, when long-term bond yields have risen faster than short-term interest rates (in technical speak, a "steepening of the yield curve") as is happening now, the sectors that have outperformed have been:

1. Media
2. Autos
2. Mining

Well, clearly Mining is not working, as it is the worst-performing sector so far this year. However, Media is outperforming nicely, led up by TV, advertising and newspaper stocks (ProSieben Sat1, ITV, Daily Mail, WPP). 

Who gets hurt by rising bond yields?

Rising bond yields could spell trouble ahead for bond-sensitive sectors such as Utilities, Infrastructure stocks and Telecoms. 

A nice mixture of dividend yield (income) and dividend growth: Dividend Aristocrats

If you are a bond investor looking to rotate out of government or corporate bonds and want some easy stock income growth funds to buy instead, I would suggest that you have a look at the following two Dividend Aristocrat ETFs from State Street, based on S&P Dow Jones Indices:

1. SPDR Euro Dividend Aristocrats (EUDV)

2. SPDR UK Dividend Aristocrats (UKDV)

Both contain an interesting blend of dividend yield plus potential dividend growth, and tend to hold a lot of low volatility stocks, so should benefit over time from the better risk-adjusted performance of low volatility stocks versus the overall stock market. 

Interestingly, both have held up very well during the recent market volatility, and look ready to move higher once again:

UK Dividend Aristocrats regaining ground

Good luck and bon weekend!

Edmund