Advertisement
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

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.

Advertisement - Article continues below

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".

Advertisement
Advertisement

Recommended

Visit/glossary/bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
Visit/519858/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
Visit/511283/investors-are-going-bonkers-for-bonds
Bonds

Investors are going bonkers for bonds

In a further sign of the mania gripping the bond market, Germany issued €3.15bn of zero-interest ten-year bonds last week.
18 Jul 2019
Visit/economy/global-economy/601425/the-charts-that-matter-the-us-and-china-the-calm-before-the-storm
Global Economy

The charts that matter: the US and China – the calm before the storm?

John Stepek looks at how the rising tension between the US and China over Hong Kong has affected the charts that matter the most to the global economy…
30 May 2020

Most Popular

Visit/economy/uk-economy/601427/covid-bounce-back-loans-and-inflation
UK Economy

What bounce back loans can tell us about how we’ll pay for all this

The government will guarantee emergency "bounce back loans" for small businesses hit by Covid-19. Inevitably, many businesses will default. And there'…
1 Jun 2020
Visit/investments/commodities/601433/commodities-possibly-the-biggest-opportunity-in-todays-markets
Commodities

This looks like the biggest opportunity in today’s markets

With low interest rates and constant money-printing, most assets have become expensive. But one major asset class hasn’t. John Stepek explains why com…
2 Jun 2020
Visit/economy/global-economy/601420/james-ferguson-the-virus-the-lockdown-and-what-comes-next
Global Economy

The MoneyWeek Podcast: James Ferguson on the virus, the lockdown, and what comes next

Merryn talks to MoneyWeek regular James Ferguson of Macrostrategy Partnership about what's happened so far with the virus; whether the lockdown was th…
28 May 2020