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Do Bond Buyers Know Something Stock Traders Don’t?

Though it's hard to say why bonds aren't responding as expected, it could be an omen of a risk-off environment


The Labor Department just reported that first-time claims for jobless benefits fell last week to 324,000 — a five-year low. Stocks answered with a brisk rally, taking the S&P 500 an eyelash above Tuesday’s record close.

Yet somehow, strangely, Treasury bonds keep scowling “no!” to just about every piece of upbeat economic news that comes along. Despite an ongoing surge in equities, the benchmark 10-Year Treasury Yield has tumbled from 2.06% on March 11 to 1.63% on Thursday.

Even after Friday’s hit to bonds that sent the rate to 1.73%, T-bond yields still are around their lowest levels since December.

What do bond buyers see that stock investors don’t?

Perhaps bond traders are casting a wary eye at Europe’s gathering storm. The European Central Bank, in a bid to counteract the continent’s deepening recession, just trimmed the bank’s key overnight lending rate to 0.5%, from 0.75% previously.

With interest rates already at virtually zero, however, such a gesture is unlikely to have any meaningful impact on economic growth. Essentially, the world’s central banks, including our own Federal Reserve, are playing what might be called (in every sense of the term) a “confidence game.”

As long as policymakers can convince investors that the big risks are under control, equities can keep rising. But the moment that gossamer thread of confidence snaps, prices will fall — hard.

Having watched the bond market for nearly 40 years now, I’ve developed great respect for its forecasting abilities. If you own the popular iShares Barclays 20+ Year Treasury Bond Fund (NYSE:TLT), I’d recommend continuing to hold it.

The time to take profits would be when the yield drops to 1.5% during any business day.

Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.

Article printed from InvestorPlace Media,

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