The topsy-turvy world of bonds

Stock and bond markets continue to send different signals. US Treasury bond yields plunged earlier this year as investors rushed into the traditional safe-haven asset. Bond yields move inversely to prices, so higher demand means higher bond prices and hence lower yields.

Yet while stocks rallied over the summer, bond yields continued to send alarm signals. The US ten-year Treasury yield, which started the year at about 1.8%, fell to 0.5% over August.

The start of this week saw gloom settle over equity markets, which would normally send bond yields even further south. Yet the US ten-year Treasury yield has barely budged, say Padhraic Garvey, Benjamin Schroeder and Antoine Bouvet of ING. Indeed, trading around 0.8% this week, it has risen since the summer lows.

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US bond movements also reflect the reflation trade (see above), says Randall Forsyth in Barron’s. The prospect of more government debt issuance, coupled with more inflation and growth in the economy, would send bond prices lower and yields higher, especially those with longer maturities.

By contrast, bond yields in Europe remain pinned to the floor, with the German ten-year Bund yielding the princely return of -0.58%. The EU has just sold a ten-year bond at a yield of -0.24%. Corporate debt markets provide the strangest spectacle of all, says Michael Mackenzie, also in the Financial Times. An economic crisis should send yields there surging, but Federal Reserve support has “turned everything on its head”, says Matt King of Citigroup.

Instead of looking at business “fundamentals” investors obsessively watch “central bank liquidity”. That might delay the default pain, but the bill for this year’s corporate “debt binge” will one day come due.