The bond market seems to be witnessing a recession on the horizon, while the stock market seems to be optimistic, especially with regard to a possible trade deal.
The 10-year yield fell Tuesday to 2.63%.
"I think that's because the market continues to worry about the economic outlook and is looking at a potential recession, we're moving down the yield band, the market has been in buy-dip mode ever since. the Fed has changed its tone, "said John Briggs, head of strategy at NatWest Markets." The decline in European yields is partly due to the decline, the economic news remains bad and another part is focused on the minutes of the FOMC … "
US yields often follow yields on German bonds, which fell due to weaker European data and political uncertainty in Europe. The yield on the 10-year German Bund was 0.10% on Tuesday, while the US 10-year yield was recently in the range of 2.60 to 2.80%.
"You went from a Fed in transition to a Fed on hold," said Briggs. "The global growth outlook has deteriorated and global central banks have become more accommodative, the winds are moving in that direction rather than the other way … Nobody moves as we thought six or eight years ago. month."
The fact that stock prices and bond prices are rising is not the usual state. While this may happen, traders think that means that a market is wrong. For example, the bond market may turn too dark for a potential recession, or the stock market may prove too exuberant, as it has moved on regardless of the slowdown in the global economy or the global economy. lower profits. Bond yields are moving against price, while equities have risen, yields – or interest rates – have fallen.
"One of the ways to interpret these moves is that an extremely accommodative Fed will keep interest rates at a low level and let risk rise." The Fed's Objective At this point is expanding its expansion, "said Jon Hill, rate policy strategist. "If they can, that means lower rates, higher shares, if they can not, we'll see the end of the cycle and the zero rates back," he said. he declares. The Fed would begin to cut rates, or even go back to zero percent. "
Hill said the mystery is the dollar and the reason it continues to rise as yields fall. One explanation is that the dollar is trading higher because the US economy is still relatively strong compared to other parts of the world.
The Merrill Lynch MOVE index shows that the bond market has become much less volatile. It has returned to an almost historical level as in 2017 and again in 2018, but also during the financial crisis. The index is based on the options on Treasurys.
"Volatility, in terms of implied volatility, is quite low, we think this is due to the fact that the uncertainty is high and that the Fed is very soothing.The Fed relieving the risk of trying to move anytime soon. flight, "said Cabana. He added that the market is also suspicious of Brexit, US-China trade negotiations and political discontent in Europe, among others.
"This reduces the willingness of market players to have firm macroeconomic views … Uncertainty weighs on market players and companies.How will you decide to make big R & D spending? and capping expenses while you fear your supply chain could be subject to a 25% cost increase.This uncertainty, coupled with a dovish Fed, contributes to low volatility, "Cabana said.
Policy makers say the Fed could start raising interest rates again if a trade deal were struck between the United States and China and economic data improved.