{"id":11522,"date":"2019-06-04T05:23:13","date_gmt":"2019-06-04T05:23:13","guid":{"rendered":"http:\/\/swwadvisors.com\/the-baffling-bond-market-weekly-economic-commentary-june-3-2019\/"},"modified":"2019-06-04T05:23:13","modified_gmt":"2019-06-04T05:23:13","slug":"the-baffling-bond-market-weekly-economic-commentary-june-3-2019","status":"publish","type":"post","link":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/the-baffling-bond-market-weekly-economic-commentary-june-3-2019\/","title":{"rendered":"The Baffling Bond Market | Weekly Economic Commentary | June 3, 2019"},"content":{"rendered":"<h3 style=\"font-size:25px\">KEY TAKEAWAYS<\/h3>\n<ul style=\"padding-top:10px\">\n<li>The 10-year Treasury yield has declined at a rapid pace. <\/li>\n<\/ul>\n<ul>\n<li>Economic fundamentals still look sound, even as yields send cautious signals.<\/li>\n<\/ul>\n<ul>\n<li>Investors around the world have rushed into Treasuries for income, safety, and liquidity.<\/li>\n<\/ul>\n<p><a href=\"\/wp-content\/uploads\/sites\/4\/2019\/06\/Weekly_Economic_Commentary_06032019.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">Click here to download a PDF of this report.<\/a><\/p>\n<p><strong>The bond market has been baffling recently.<\/strong> While U.S. stocks surged earlier this year, the 10-year Treasury yield quietly crept lower, puzzling market participants as the typical relationship between stocks and bonds (higher stock prices, higher yields) broke down at a rapid pace.<\/p>\n<p>Then, the alligator jaws snapped shut. The S&amp;P 500 Index has dropped about 6% since reaching a record high on April 30, and the decline of long-term government bond yields across the globe picked up speed <strong>[Figure 1]<\/strong>. Last week, the 10-year yield posted its biggest weekly drop in over four years to close at a 20-month low of 2.12%, and parts of the yield curve have flipped back into inverted territory (long-term rates falling below short-term rates).<\/p>\n<p>The bond market\u2019s excessive pessimism has commanded Wall Street\u2019s attention, and we\u2019ve seen several interpretations of Treasuries\u2019 cautious undertones. We\u2019ll sort through a few of them below.<\/p>\n<p><img decoding=\"async\" style=\"margin-left: auto;margin-right: auto\" src=\"\/wp-content\/uploads\/sites\/4\/2019\/06\/Weekly_Economic_Commentary_06032019-pdf-1.png\"><\/p>\n<h3 style=\"font-size:25px\">ECONOMIC PROSPECTS<\/h3>\n<p>The bond market has a reputation as one of the best predictors of economic prospects, so the recent drop in long-term yields has fueled recession fears.<\/p>\n<p>To be fair, there is evidence of weakness in economic data. Recent durable goods orders, industrial production, and manufacturing data have shown that global demand continues to soften. Some of the 10-year yield\u2019s biggest drops this month occurred on days these reports were released. <\/p>\n<p>The bulk of economic fundamentals don\u2019t support a 10-year yield nearing 2%, though. The economy has been growing at a 3% rate, according to last quarter\u2019s gross domestic product (GDP) growth; wage growth is healthy; and the U.S. labor market is close to full employment.<\/p>\n<p>We also haven\u2019t seen signs of stress in other fixed income indicators. The spread between the 2-year and 10-year yields increased last week and remains squarely in positive territory, and corporate debt spreads have been relatively contained. We\u2019d expect to see more deterioration across credit markets if a recession were imminent.<\/p>\n<h3 style=\"font-size:25px\">SAFE HAVEN TRADING<\/h3>\n<p>U.S. economic fundamentals look sound, but the rest of the world has struggled with signs of slowing this year. Trade and political headwinds have weighed on the global economy, and the most recent escalation in trade discord has been overwhelming for sovereign debt rates. The 10-year German bund yield is hovering around a record low,<br \/>\nand the amount of negative-yielding global debt has climbed above $11 trillion <strong>[Figure 2]<\/strong>. <\/p>\n<p><img decoding=\"async\" style=\"margin-left: auto;margin-right: auto\" src=\"\/wp-content\/uploads\/sites\/4\/2019\/06\/Weekly_Economic_Commentary_06032019-pdf.png\"><\/p>\n<p>Because of this, global investors have piled into Treasuries at an increasing rate as they search for income, safety, and liquidity. Global stocks\u2019 recent slide has also sparked a safe-haven rush into Treasuries as investors look to hedge stock losses.<\/p>\n<p>Fixed income investors\u2019 insatiable appetite for Treasuries could be a product of global uncertainty, and we expect it to continue as trade tensions between the United States and China remain elevated. We see a high chance of some negotiation on the horizon\u2014maybe not a trade deal, but at least a trade truce that allows discussions to get back on track. If this happens, we\u2019d expect stabilizing global growth to help support yields worldwide.<\/p>\n<h3 style=\"font-size:25px\">RATE CUT POSITIONING<\/h3>\n<p>Trade and political headwinds have understandably spooked investors, and they\u2019ve increasingly positioned for Federal Reserve (Fed) rate cuts. <\/p>\n<p>The 2-year yield has dropped more than 50 basis points (0.50%) below the upper-bound fed funds rate, and fed fund futures are now pricing in a near certain chance of a lower policy rate by year-end. Even though short-term yields are more reflective of monetary policy, the growing consensus for loosening policy has weighed on the entire Treasury curve. <\/p>\n<p>We don\u2019t see the argument for a lower policy rate should trade tensions improve, which remains our base case. However, a protracted trade dispute could further weigh on growth and justify a cut. The Fed has already communicated a pause in policy adjustments until there is greater clarity on global conditions, which we think could come from U.S.- China trade progress. Clarity on trade should lead to a resurgence in business and consumer demand, which would eventually necessitate tighter policy\u2014 perhaps not in 2019, but later in this economic cycle.<\/p>\n<p>The Fed has repeatedly said policy decisions are data-dependent. While policymakers consider financial markets in their deliberations, they ultimately operate under a dual mandate of stable inflation and maximum employment (with an unofficial third mandate of global stability). It\u2019s tough to make a case for lower rates with over 3% GDP growth, healthy wage growth, and a labor market close to full employment. The Fed also understands that any cut<br \/>\nnow would reduce its ability to adjust policy when a recession does materialize.<\/p>\n<p>If the United States and China come back to the table, we would expect stabilizing growth expectations to fuel<br \/>\na reversal in rate cut positioning and a rebound in yields.<\/p>\n<h3 style=\"font-size:25px\">CONCLUSION<br \/>\n<\/h3>\n<p>One of our biggest challenges this year has been explaining a bond market that\u2019s become increasingly pessimistic on the economic outlook. In any case, we encourage investors not to get too caught up in Treasuries\u2019 cautious signaling. We see plenty of evidence that solid U.S. fundamentals are intact, and we don\u2019t think yields\u2019 recent decline is simply an indictment of future economic growth. We think the most plausible explanation here is that intensifying trade and political risks have ignited a wave of panic buying in U.S. debt, a trend we expect to reverse as trade risk subsides. <\/p>\n<p><em>&nbsp;<br \/>\n<strong>IMPORTANT DISCLOSURES<\/strong><\/p>\n<p>The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.<\/p>\n<p>The economic forecasts set forth in this material may not develop as predicted.<\/p>\n<p>Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.<\/p>\n<p>All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. U.S. Treasuries may be considered \u201csafe haven\u201d investments but do carry some degree of risk including interest rate, credit, and market risk. They are guaranteed bythe U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.<\/p>\n<p>This research material has been prepared by LPL Financial LLC.<\/p>\n<p>To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.<\/p>\n<p>If you are receiving investment services out of a bank or credit union, please note that this financial institution is not a registered broker\/dealer, and is not an affiliate of LPL Financial. The investment products sold through LPL Financial are:<\/p>\n<p>Not FDIC or NCUA\/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank\/Credit Union Deposit<\/p>\n<p>Tracking #1-859273 (Exp. 06\/20)<\/p>\n<p> <\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Economic fundamentals still look sound, even as yields send cautious signals.<\/p>\n","protected":false},"author":2,"featured_media":11523,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","wds_primary_category":0,"footnotes":""},"categories":[12,15],"tags":[],"class_list":["post-11522","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-research","category-weekly-economic-commentary"],"_links":{"self":[{"href":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/wp-json\/wp\/v2\/posts\/11522","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/wp-json\/wp\/v2\/comments?post=11522"}],"version-history":[{"count":0,"href":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/wp-json\/wp\/v2\/posts\/11522\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/wp-json\/wp\/v2\/media?parent=11522"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/wp-json\/wp\/v2\/categories?post=11522"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/advisors2.bradcable.com\/swwadvisorsdavid\/wp-json\/wp\/v2\/tags?post=11522"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}