While stock markets have sold off from their highs on May 1st, the signals being sent to investors from the bond markets are raising questions. The questions that have arisen with the US trade talks raging wth China and growing concerns about the US, China and global economies, seem to be guiding investors toward bond markets – keep in mind that bonds are viewed as a less volatile and somewhat safe investment so as concerns grow, bonds perform well.
The US 10 Year Treasury, is now trading near the 2.40% level, or 40 bps below the 2018 highs and within 10 bps of its year-to-date low. Yields move inversely to prices – so bond prices rally and their yields fall. But think about the fall in yields as a vote of confidence in the economy starting to weaken, perhaps in the next 12-months, again we are reading price action and investors flows. Many people are uncomfortable with the trade talks and, as we have said on this platform many times, the talks will only bring short-term and superficial solutions, no significant and meaningful deals.
S&P 500 sectors that reached all-time highs this year are tech, consumer discretionary, and defensive stocks such as real estate and utilities. This market unease has been reflected in the flow of funds – with $135 billion exiting the stock market and $169 billion moving into bond funds this year. Since it is difficult to see through the noise, markets will likely be volatile in the coming months, with the core drivers less conspicuous.