Bond market signals gloom ahead

The bond market has a much better record than the stockmarket of predicting economic downturns. And last week, yields on ten-year US Treasury notes dipped as low as 2.37%.

US retail sales are robust

2009 AFP

May has proved a turbulent month for investors, prompting many to wonder if the US bull market that began in March 2009 the longest on record is coming to an end. Those inclined to take a more negative view on the outlook for equities are pointing to signals coming out of the bond market. When investors are fearful they pile into safe fixed-income assets, such as government bonds, which drives down their yields. When bond prices go up, yields fall.

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Yields on ten-year US Treasury notes dipped as low as 2.37% last week, notes Peter Wells in the Financial Times, close to a 15-month low reached in March. Yields on short-dated three-month bills are higher than those that lock up your money for ten years. Such an "inverted yield curve" has "preceded every recession since World War II". Equity investors should take note, says Komal Sri-Kumar on Bloomberg. "Historically, the bond market has had a better record" than equities of predicting economicperformance.

Bulls will note, however, that the inverted yield curve signal is hardly foolproof, and while the intensifying trade war is certainly a major headwind (see above), there are reasons to hope that this bull market will keep on running, as IG analyst Chris Beauchamp points out in City AM. The US "employment picture, corporate profits and retail sales" all suggest that a recession is still at least "a year away". Indeed, the rush to buy up safe-haven assets could be a sign that the market has not yet peaked. "Money has ... left the US and European equity funds this year," says Jon Sindreu in The Wall Street Journal, even though US first-quarter earnings topped expectations. "If the top of the market is a point of peak optimism" when investors go "all-in", then the most recent highs are "an unlikely candidate".





A bond is a type of IOU issued by a government, local authority or company to raise money.
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