Features

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%.

948_MW_P04_Markets_Bottom

US retail sales are robust

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.

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".

Recommended

The charts that matter: bond yields turn back up and a new bitcoin record
Global Economy

The charts that matter: bond yields turn back up and a new bitcoin record

Bitcoin hit a new all-time high, while government bond yields turned back up. Here’s how that has affected the charts that matter most to the global e…
23 Oct 2021
Green finance is set to be the most powerful financial repression tool yet
Bonds

Green finance is set to be the most powerful financial repression tool yet

The government has launched its “green savings bond” that offers investors just 0.65%. But that pitiful return is in many ways the point of “green” fi…
22 Oct 2021
Equities are not a good inflation hedge
Economy

Equities are not a good inflation hedge

Institutional investors are definitely now worried about inflation. But they're not yet worried enough to flee to cash, says John Stepek
22 Oct 2021
Why fed-up workers are quitting their jobs
Economy

Why fed-up workers are quitting their jobs

Workers are leaving their jobs at an astonishing rate, especially in the US, leading to a shortage of workers. What will that mean for our economies? …
22 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021