Magnificent 7 to the Rescue!

Confluence Investment Management offers various asset allocation products which are managed using “top down,” or macro, analysis. We publish asset allocation thoughts on a bi-weekly basis, updating the report every other Monday, along with an accompanying podcast.

The traditional role of Treasurys as a safe-haven asset has eroded. For example, Treasury prices fell in the last quarter of 2024 despite escalating geopolitical tensions in the Middle East, concerns about global economic growth, and heightened political uncertainty in developed nations. This weakening in the demand for Treasurys was largely driven by investor anxieties over the future rate of inflation and the widening budget deficit. For many market participants, concerns about the outlook for Treasurys have fueled a resurgence of interest in the Magnificent 7 as a target for safe-haven flows.

This shift in preference was partly driven by expectations surrounding the incoming administration. Leading up to the election, investors began divesting from US government bonds and purchasing mega-cap tech stocks. This shift reflected growing optimism for a pickup in economic growth and declining confidence in the Federal Reserve's ability to cut interest rates.

Consequently, from September to December, the yield on the 10-year Treasury note surged nearly 100 basis points, while the Magnificent 7 stocks surged almost 24%.

Investors Prefer Equities Over Bonds

The unraveling began when the Federal Reserve initiated a series of rate cuts last fall. Despite the Fed lowering interest rates by 100 basis points across its final three meetings, the 10-year Treasury yield surged by a comparable amount instead of declining. This divergence stemmed from policymakers' reluctance to commit to further monetary easing, particularly as the economy showed signs of accelerating. The presence of two dissenting votes during these meetings further reinforced concerns that the central bank may be hesitant to loosen policy.