7/11/2019

The bond market and the stock market can’t both be right

"Global bond markets are behaving as if major trouble lies ahead for the US and global economies.


One indication of this dismal view is the fact that US 10-year Treasury yields have dropped to below 2% and are now well below the Federal Reserve’s short term policy rate of 2.4%. This so called inversion of the yield curve tells us that US government bond market participants are thinking that the US is heading for an economic recession that will force the Federal Reserve to cut interest rates several times in the year ahead.

Another bond market indication that real trouble might lie ahead for the world economy is the fact that a record $13 trillion of global sovereign bonds are now trading with negative interest rates. Negative interest rate bonds now account for around half of all European government bonds. In Germany, for example, one has to pay around 0.4% a year for the privilege to lend interest free to the German government over a 10-year period."