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

Bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
How will we repay our vast debt pile? Do we even need to?
Sponsored

How will we repay our vast debt pile? Do we even need to?

In his recent articles looking at different aspects of the fixed-income investing world, David Stevenson looked at inflation. Today he looks at a clos…
19 Oct 2020
The charts that matter: pre-election paralysis
Global Economy

The charts that matter: pre-election paralysis

Markets are caught in the headlights as the US election approaches fast – John Stepek looks at how the charts that matter most to the global economy a…
17 Oct 2020

Most Popular

Why commodities could be the best investment for 2021
Commodities

Why commodities could be the best investment for 2021

There’s plenty for investors to worry about right now. But things will inevitably recover. And the sector most likely to do best when they do, says Jo…
22 Oct 2020
Negative interest rates and the end of free bank accounts
Bank accounts

Negative interest rates and the end of free bank accounts

Negative interest rates are likely to mean the introduction of fees for current accounts and other banking products. But that might make the UK bankin…
19 Oct 2020
Buying bitcoin could be the best way to play the remote working boom
Bitcoin

Buying bitcoin could be the best way to play the remote working boom

The coronavirus pandemic has accelerated the move to home working, flexible employment practices and the rise of the “digital nomad”. One of the best …
21 Oct 2020