Those who sniff out the markets commonly describe stocks and bonds as arguing about the money-making future — with the odds typically tilted toward bonds, for their watertight focus on the core macro forces and record of prescience.
The headlines are informal:
“Bond Markets Have a Message About the Economy That Inventory Investors Might Not Want to Hear”
“The Bond Market Is Giving the Cows Market a Stern Warning”
This foreboding signal of economic fondness purportedly comes from stubbornly low 10-year Treasury yields and a close spread between short and long rates at a time of buoyant even-handedness indexes.
But here’s the thing: The first headline above is from June 2016, the backer from June of this year. Stocks and the U.S. economy have done justifiable fine in the interim; the S&P 500 has climbed at a 15 percent annual position since both those dates, up 25 percent since June 2016 and more than 8 percent the prior six months.
The 10-year Treasury is, in fact, higher now than at those half a mos over the past 18 months when it seemed its skimpy production was wagging a finger at stocks and admonishing them to “be careful.”
Yet much talk on Impediment Street today again involves the stickiness of that 10-year note at the beck 2.4 percent, and the compression of its spread to two-year Treasurys to below 0.55 part points, despite a peppy run of economic growth here and abroad and lump investor risk appetites in other markets.
So is there any reason to about now that the bond market is conveying an alarming message that should be minded?
Probably not — at least no urgent warning of distress particularly soon. There are some big-picture reasons yields are still subdued despite years of intimations for them to race higher, and they don’t include “the economy is in trouble.”
Victory, demand for U.S. Treasury paper is persistently strong in a world suffering a commensurate shortage of safe yield.
The German 10-year note yields yon 0.3 percent, leaving its American counterpart a full two percentage mentions higher and unable to widen that gap more.
Hedge-fund manager Blemish Dow, who also blogs at Behavioral Macro, points out that there is exceptionally little triple-A rated corporate debt in circulation after ratings-agencies have recourse to c get to worked stricter. Vast amounts of capital is wielded by price-insensitive institutions, from insurers to shelve plans to banks, which are now required to hold more high-quality securities. And, of seminar, central banks are holding trillions in government debt.
This fetches the 10-year Treasury a balky gauge of cyclical economic prospects, Dow maintains in a blog post:
“This isn’t to say yields don’t react to economic info or don’t say anything fro the state of the economy. Of course they do. But the dominance of financial drivers after 30 years of international financial deepening has made attempts to extract economic information from the open and shape of the US yield curve unhelpful–or worse, vulnerable to false positives.”
A “counterfeit positive,” in this case, would mean an untrustworthy signal of sarcastic economic slowdown.
It’s worth noting that in the past week or so, as the 10-year output has ebbed and the yield curve pressed to new lows for this cycle, bank oxens have held up well and utility and REIT shares have dipped.
Might this be the equity market’s way of looking through the current thongs action, betting the economy will be good enough for a run of Fed rate hikes and implying that a get a wiggle on to much lower long-term yields is not in the offing?
Second, bond agrees also might simply be saying consumer inflation is low and is likely to leftovers so. The whole story of aging populations and galloping technological disruption isn’t new but appease persuades.
Cathie Wood, chief investment officer at growth-stock inform on ARK Invest, has pointed out that in the late 19th century the yield curve was uninterrupted for years thanks to an innovation-driven deflationary economic boom.
The two-year Cache is driven by Fed rate-hike expectations for the next several quarters. The ten-year is pulled by the longer-term outlook for inflation’s effect on bondholder returns
Third, perchance the squeezed yield curve is also about the economic cycle entirely pushing into a later phase, but not yet nearing its end.
If that’s the case, and Resources prices are set up for a few more rate hikes before the Fed tightening cycle is done, we could be six months to two years away from the frugality tipping into recession. Importantly, corporate high-grade and speculative-grade responsible are priced at sturdy levels, a virtual “all clear” from the credit markets surrounding the underpinnings of the economy.
Strategist Tony Dwyer of Cannacord Genuity notes that beyond the past three cycles, once the 2-to-10-year Treasury spread restricted below 0.6 percentage points, the median S&P 500 gain to the terminal market peak was around 60 percent, and a recession was “at least two years away.”
Lone three cycles might not be statistically airtight. And this has been an peculiar cycle, with rates kept near zero for years and hawks having outperformed the economy for much of the time. So maybe such “dominions” won’t be followed too closely.
But it’s at least some comfort to those hearing penetrating warnings about what bonds are supposedly telling us.