Plunging Treasury bond yields spooked a lot of investors this past week, especially after the yield on the 10-year Treasury briefly fell below that of the 2-year for the first time in more than a decade. That so-called inverted yield curve has preceded each of the last seven recessions.
But Scott Ladner, chief investment officer at Horizon Investments, tells Yahoo Finance’s The First Trade that the U.S. stock market shouldn’t necessarily be taking its cue from the bond market right now.
That’s because about $17 trillion of government bonds worldwide are trading at negative yields, according to Bloomberg. Ladner says investors who are chasing yield and looking for a relatively safe investment have little choice but to pile money into U.S. Treasuries. When demand is strong for treasuries, bond prices rise and their yields fall.
The 10-year-yield is back above 1.5% now, but it fell below that mark Thursday for the first time since 2016.
“That’s signaling that global rates around the world are dropping precipitously,” says Ladner. “Investors around the world are searching for any yield they can find. [They’re] buying U.S.10-years and long bonds and equity investors are misinterpreting that as signs of an impending recession in the U.S., and there’s no shot of that right now.”
Investors are nervous
Gennadiy Goldberg analyzes yield curves as the senior U.S. rates strategist for TD Securities USA. He tells Yahoo Finance that inverted yield curves are a good predictor of recession 7 to 18 months after the inversion.
“I’d say markets are correct to be a little bit nervous here,” Goldberg says.
“We’ve looked at every yield curve that there is, and if you look at the 3-month and 10-year, [which inverted in March] that’s predicting about a 60% chance of recession.”
Goldberg says global investors are pouring money into U.S. Treasuries because they’re nervous.
“It’s not so much that you’re getting a better return here, it’s because this is the safe haven,” he said.
Looking to Jackson Hole
Goldberg says a big reason why the stock market has been able to bounce off its recent lows is that rates are so low.
“The discount rates are a lot lower so valuations go up, now if the Fed doesn’t want to pre-commit [to cutting rates further] and equities do actually decline, what does that do to the bond market? Well, it’s gonna make a yield of 1.55% look like a great yield that you should have gotten into a lot earlier,” says Goldberg.
St. Louis Federal Reserve President James Bullard says only a ‘sustained’ bond inversion would be a bearish signal. This past week, the yield curve on the 2 and 10 year bonds inverted only briefly.
Federal Reserve Chairman Jerome Powell is scheduled to address an annual central bank forum in Jackson Hole, Wyoming next week. Powell’s comments will be closely watched for fresh hints on the outlook for interest rates.
“Chair Powell told us at the July press conference that they’re kinda feeling their way through the dark on this,” says Goldberg. “There’s no playbook for responding to global trade uncertainty.”
Alexis Christoforous is co-host of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.