Ep. 116A – Trouble in the Bond Market?

The Kapital News
The Kapital News
Ep. 116A - Trouble in the Bond Market?

What is the signal that the bond market is telling us? Over the prior months, the bond market was making record lows or near record lows with respect to their yields – of course we’re talking about US Treasuries. The 30 year bond actually did make an all-time low when it was yielding less than 2%. We said at the time that this was akin to saying that the markets were pricing in very slow growth for an extended period of time, which was reflected in the rates. We also said this was consistent with market expectations that the Federal Reserve was going to continue cutting interest rates and perhaps mention future rounds of QE. In addition, we know that the ECB has just cut interest rates even deeper into negative territory and are starting another round of QE, set to begin on 1 November. We also anticipate other central banks will continue or begin cutting rates as well. This then means that market expectations for lower rates were being realized when we witnessed yields on Treasuries continue their descent. Fast forward to the last week and a half and we see quite the reversal. Yields on Treasuries have moved up significantly coupled with major stock market indexes nearing all-time highs. The paradigm for the last decade has been lower interest rates and bond yields and higher stock prices. Now over the last week and half, we have higher yields and higher stock prices. Why the disconnect and might there be something brewing underneath the surface? Is this simply retail investors, hedge funds, and the like moving away from the “safety” of bonds and into riskier assets like stocks? Or is the bond market now all of a sudden concerned with inflation and is demanding a higher yield in order to be compensated for the loss in purchasing power? Or might this be something more sinister from say, China, selling their US Treasury holdings? The narrative and the economic fundamentals have not dramatically changed to warrant such a move in the bond market – so why did it happen? With the Fed set to cut interest rates, will the bond market reverse course back to lower yields or will the Fed have to get even more aggressive to get yields even lower, which would mean massive balance sheet expansion or QE. Either way, this is not good for the markets and most definitely not for the economy and the average American. This matter warrants our attention. Stay diversified, stay vigilant, and stay with The Kapital News. #Recession #Bonds #Economy #EndTheFed #Politics #Stocks #InterestRates

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