Bond Market Dancing To A Different Tune Than Equities

Whenever we see trends in the market we immediately look for confirming data points. With the impressive rise in equity markets since the election, we look at the bond market to see if there is agreement on all this bullishness. There isn’t.

“The bond market is taking a totally different view from the equity market. Blowing raspberries is a good way to put it,” says Jim McCaughan, chief executive of Principal Global Investors. “There’s no belief that the growth agenda will be dramatic.”

After having thrown everything possible at the bond market, from a hawkish Fed to pro-growth promises from President Trump to ebullient sentiment surveys and a record-smashing equity rally, the best the 10-year Treasury can muster is to butt its head against 2.5 percent?

The 10-year forward rate is 3.6 percent, which is well below the long-run norm of 5.5 percent and implies a real neutral interest rate of around 1.6 percent. This at a time when the Federal Reserve is claiming that we are near full employment?

The yield curve — the relationship derived from the various maturities of Treasury bonds — also signals a subdued outlook. The difference between two- and 30-year Treasury yields stands at just 176 basis points, not far from the nine-year low of 140bp touched last August.

Yes, but what about all that glorious survey data?

According to David Rosenberg of Gluskin Sheff, going back to 2000 there was one other period in which Bloomberg’s economic surprise index for surveys and business cycle indicators was as unambiguously euphoric relative to market expectations. That was back at the beginning of 2011, which ultimately saw GDP for the year at a painful 1.6 percent with a macro backdrop so painful that the headlines were full of prognostications for a double-dip recession. Recall that at the start of 2011 the ISM manufacturing index started out at 59.6 but ended the year at 52.9.