Displaying items by tag: bonds

(New York)

If you look at some of the areas hardest hit by fears over the economy and the trade war, there is cautious optimism starting to show up. One of the best examples of this is the corporate bond market. Investors have been pulling money from the stock market and sticking it in bonds. They appear to be unworried about high debt levels or the possibility of default. In this move, there is an underlying faith that the US economy will stay solid, otherwise credit-worthiness would be seriously in question. Spreads to Treasuries are very low too, further reflecting the optimism.

FINSUM: It seems like the market is worried that stock valuations are tapped out, but that there may not be a significant downturn. In such a case, corporate bonds look like a good bet.

(New York)

The last month has been an unusually tough market. While the volatility itself is not highly irregular, what has been difficult is the rise of correlation. Over the last month, the market has traded the same way a whopping seven times. On those days, stocks, bond yields, and commodities have all traded in the same direction. When that happens it is very hard for investors to find a place to hide.

FINSUM: A couple of months ago using bonds as a safe haven seemed like a good idea. But prices have gone up so astronomically without a real change in the economy, that fixed income is looking like a fragile place to hide.

(New York)

New data just released shows the US economy is a bit weaker than everyone expected. Second quarter GDP data has been revised downward, showing that the US expanded at only 2.0% in the quarter instead of the first-reported 2.1%. Government spending, weaker exports, and private inventories weighed on the numbers. However, the very good news in the data is that consumer spending increase was the strongest in 4.5 years.

FINSUM: Consumer spending is at its highest levels since 2014 at the same time as bond yields are at extraordinary lows and everyone is worried about a recession. Either a recession will arrive or there will be some big losses in bond markets.

(Los Angeles)

Pimco is probably the most respected name in fixed income, and the firm just went on the record warning about the economy and encouraging the Fed to act. The asset manager argues that the US economy is in worse shape than many think and is admonishing the Fed to cut rates more aggressively than expectations. Pimco says that momentum in the labor market is slowing, the trade war is showing little sign of abating, and the risk of financial excess caused by lower rates appears minimal. According to Pimco, “We can’t emphasise enough that labour market momentum has decelerated more markedly than most forecasters were previously expecting”.

FINSUM: We actually are on the opposite side of the fence as Pimco. We think the market is blowing things out of proportion about the economy and is overly worried. We surely hope we are right.

(New York)

The bond market is doing something that it usually doesn’t—it is scaring stocks. Generally speaking, big sell offs in stocks drive moves in bonds, but rarely do moves in bonds spook stocks. Except for right now, that is. The ten-year yield dropped to 1.48% recently, below the two-year’s 1.51%, signaling another 2y-10y inversion which is a classic recession indicator. But the 3m-10y is even scarier as it touched a fresh new low of negative 51 basis points.

FINSUM: The bond market thinks a recession is coming and that Fed policy is too tight. The velocity with which that sentiment is driving yields is spooking stocks, and rightly so.