With the U.S. economy accelerating and unemployment falling you’d think a recession was the last thing on anybody’s mind.
And yet the bond market which has a strong track record for predicting economic problems is flashing warning signals.
So what is the bond market trying to tell us? Global government debt is pushing yields, which move in the opposite direction from their price, to astonishing lows. The yield on the 10-year Treasury note — a benchmark for mortgages and other interest rates — fell below 2 percent on Tuesday. Any investor holding that security would be paid only 1.94 percent each year, for the next 10 years. In the past, such a return would have been considered unthinkably slight.
In Europe, where the economies are weaker than in the United States, yields are even lower. The yield on the German 10-year note, for instance, fell to 0.44 percent on Tuesday. And Japan’s 10-year government security now yields an almost nonexistent 0.28 percent.
“Make no mistake, these low levels of rates are challenging the notion that we are going to see robust and constant growth,” said George Goncalves, a bond market analyst with Nomura.
In other words, the bond market is raising the specter that a period of economic growth that may have already felt lackluster to many Americans could be on the verge of losing steam.
Todays Other Top Stories
Learn Bonds: – The top three reasons to own bonds. – For those that have been riding the stock wave higher the past six years, it may be easy to opine that there are no good reasons to own bonds. However when everyone becomes fond of a security or asset class, from a contrarian viewpoint, it oftentimes signals a topping out point. Ergo, it may be better to sell or minimally stop buying that asset when everyone else falls in love with it.
Bernardi Securities: – Illinois Public Pension Compendium – Part Three: Components of Change in the UAAL. – In part three of our Illinois Pension Series, Components of Change in the UAAL, we will elaborate on the relationship between assumed versus actual investment returns, touch upon the performance of the State of Illinois’ pension bonds, and compare the condition of the State of Illinois’ pension system relative to five other states.
Bloomberg: – Vanguard set to offer its first muni-bond ETF on tax-free appeal. – Vanguard Group Inc. plans to offer its first exchange-traded fund focused on the $3.6 trillion U.S. municipal-bond market.
OppenheimerFunds: – Recapping a solid 2014 for muni bonds. – 2014 has been a strong year for municipal bonds overall. And, while there are some challenges ahead, munis also have some tailwinds.
ETF Database: – Municipal bond market heats up. – Bond investors are gearing up for what should be an interesting year for fixed income markets. In 2015 diverging monetary policies from around the globe will drive bond markets. In the U.S., however, the Fed’s plan to adopt a tightening monetary policy will likely have a significant impact on both corporate and government domestic bonds. One corner of the market that investors should certainly keep a close eye on is municipal bonds, which have recently exhibited stellar performances.
Business Insider: – If there’s a bubble forming anywhere, it’s in the bond market. – For Gluskin Sheff’s David Rosenberg, the demand for bonds that’s causing their prices to rally may be the beginning of a bubble. Bond yields fall when prices rise.
Money News: – Fed will surprise markets with rate hike before mid-year. – For each of the last 30 years, Byron Wien, vice chairman of Blackstone Advisory Partners, has put together a list of what he sees as the 10 biggest surprises for the coming year. One of the major predictions on the 2015 list is that the Federal Reserve “finally raises short-term interest rates, well before the middle of the year, encouraged by the improving employment data and strong Gross Domestic Product growth.
CNBC: – The market has spoken on bond yields. – Another day of LOWS: low oil, low euro, and low bond yields. German bund yields fell 15 percent to 0.44 percent! Wow!
Bloomberg: – Treasuries drop ends seven-day gain before Fed minutes. – Treasuries fell, halting a seven-day rally that carried yields to almost record lows, on speculation Federal Reserve minutes of its December meeting will show a central bank intent on raising rates this year.
Investment Grade Bonds
Bloomberg: – Caesars swaps ruling heads to arbitration panel, ISDA says. – An arbitration panel will rule on whether $26.9 billion of credit-default swaps linked to Caesars Entertainment Corp. (CZR) should be settled after a committee of bonds traders failed to make a decisive ruling.
High Yield Bonds
Bloomberg: – Junk-bond baby dumped with bathwater in oil rout, Lillard says. – Prudential Financial Inc. (PRU), the life insurer with more than $1 trillion of assets under management, said investors concerned about possible defaults of oil and gas companies are overlooking opportunity elsewhere in junk bonds.
Fortune: – Investors to take hit as 1st default for Chinese bond market looms. – The collapse of the bubble in China’s real estate market is about to hit international financial markets.
IFR: – JP Morgan forecasts modest returns from EM debt. – JP Morgan forecasts emerging markets hard currency debt will return 4%—6% this year, with spread tightening offsetting higher US Treasury yields.
ValueWalk: – Catastrophe bond issuance hits record $8.8 billion in 2014, Artemis reports. – The amount of catastrophe bonds and insurance-linked securities (ILS) issued reached a record level in 2014, according to Artemis.bm, a leading online source of news, analysis and data on the growing ILS, catastrophe bond and alternative reinsurance capital markets.
Investment News: – ETF managers, bringing in historic levels of cash, still preparing for a bear. – As dollars in funds top $2 trillion, managers ready exotic products for a new market environment.
Zacks: – Bill Gross cautious on rate hike in 2015: 2 Investment grade bond funds to buy. – According to the ‘Bond King’ or bond investor extraordinaire William Hunt ‘Bill’ Gross, the good times may be over and many asset prices may drop in 2015. Record-low rates have failed to spur enough economic growth, according to Gross, and he believes the Fed may not be in a position to hike rates until late this year, if it at all does.
New York Times: – Pimco cuts access to some quarterly investment reports. – The bond giant Pimco has removed from its website the quarterly investment reports of two large mutual funds that were managed by William H. Gross before he was forced to leave the firm last year.
LA Times: – Bond fund giant Pimco has $150.3 billion in outflows in 2014. – Investors withdrew a record $150.3 billion from bond fund giant Pacific Investment Management Co. last year, lashing back against weak performance at the flagship Pimco Total Return Fund as well as management turmoil.
Buy stocks when VIX > 20 is a great example of an investment heuristic that’s become popular the last few years
— David Schawel (@DavidSchawel) January 7, 2015
So, in 4 days, the Barclays US Treasury 20+ index is up 4.3%. For bonds, that’s not bad. Sell in early January and go away? @RichardLeong2
— David Gaffen (@davidgaffen) January 7, 2015
pay no mind to the Fed they are laggards – the bond market is singing Hall and Oates on inflation (She’s Gone). The recession is coming..
— Michael Pietronico (@MillerTabak) January 7, 2015
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