Bonds Not Playing Along -- So What Gives?
By Mike Larson
I’m a bond guy. I’m not afraid to admit it. The action in Treasuries, or emerging-market debt or even municipal bonds may sound boring to some people. But I find that fixed-income markets often provide early and accurate information about the economy, not to mention the next major moves in stocks.
So with that in mind, what gives with Treasuries here? The Dow Industrials jumped almost 500 points at the end of last week. The Powershares QQQ Trust (QQQ) jumped to within a couple bucks of its summer high.
But 30-year Treasury Bond yields have barely budged, and are still holding firm in the 2.85%-2.9% area. Moreover, the 5s-to-30s Treasury yield spread actually shrank in the past few days … and the 2s-to-10s yield spread hasn’t been able to get off the mat for the past few months.
These are the exact opposite reactions you’d expect to see in bonds from an easing in policy — which is designed to boost growth and inflation after all. Stated another way: If bond investors really believed that yet another round of global QE would succeed in boosting economic prospects, they’d be selling the heck out of bonds. They’re not. That tells me they know it’s going to fail just like every single previous round did.
While I’m highlighting market oddities, I’d note that natural gas prices plunged to fresh multiyear lows in the past couple of days. Crude oil also dropped back below $45 a barrel.
That’s certainly not the kind of reaction you’d expect from another economic shot in the arm from policymakers. Nor is it a positive for the credit quality outlook, given investor worries about the ability of energy companies to service their large debt loads.
I suppose I could also point out that the broader Russell 2000 Index is barely moving at all, despite the surge in mega-cap stocks. Then there’s the Dow Jones Transportation Average. It remains far below its previous high, which was set all the way back in November 2014.
Bottom line? I’ll be the first to admit I was surprised by the magnitude of last week’s rally. But it’s clear bond investors aren’t buying the euphoria yet. Unless and until that changes, I remain wary of risk assets in general … and many stocks in particular.
What do you think? Are bond investors on to something? Or am I just worrying about nothing here? Do new lows in natural gas, or ongoing weakness in crude oil prices, concern you? Or is the strength in tech stocks and big cap names enough to keep you “long and strong” the market? I’d love to hear from you at the Money and Markets website when you have a chance.
