Treasury bonds and their associated funds just had one of the worst periods on record. Specifically, they had their worst week since Trump was elected. The iShares 20+ Year Treasury Bond ETF fell 6.2% in a week, the sharpest drop since bond markets panicked on Trump’s surprise election. What is odd about the big drop is that the stock market remained relatively muted throughout. Usually, big losses in Treasuries come when there is a big risk-on rally in stock markets.
FINSUM: There has been a huge rally in bonds, and in the last week, a lot of the pessimism has faded from markets as economic data is relatively stable and trade war fears are ebbing. Accordingly, this could be the start of a real rout.
If higher inflation could be a headwind to rate cuts by the Fed, then there is new data today that could prove a tailwind. New figures show that retail spending was significantly weaker in August than in past months. The data showed that core retail spending stagnated after several months of strong expansion. The data is crucial because consumer spending, and American consumer health generally, has been a bedrock of the economy.
FINSUM: The American consumer has been keeping the economy afloat despite a lot of negative signs around the margins. This could either be a blip or the start of a worrying trend.
Everything you think about the direction of rates could be wrong. That is the general fear after this week’s inflation report. US core consumer prices hit a one-year high in August at 2.4% year-on-year growth, ahead of the Fed’s target. Importantly, it was also a bit higher than expectations. The Fed’s new cutting agenda is partly predicated on the fact that inflation has been so subdued, so any change to that assumption could prove disruptive to a cutting cycle.
FINSUM: We don’t think one month’s report will change the Fed’s path, but it is certainly something to keep an eye on. It is going to make September’s inflation report a lot more important.
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.
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.