By David Berman
The widening gap between the S&P 500 and U.S. bond yields is attracting a lot of attention right now. No wonder: The gap suggests that the bond market and the stock market are taking two very different views on the future. Clearly, only one view can be right.
In the one camp, the S&P 500 slid last summer over concerns about Europe and the U.S. economy, but has since rebounded about 17 per cent since the start of October, suggesting that equity investors are upbeat.
In the other camp, the yield on the 10-year U.S. Treasury bond slipped with stocks last summer, when it yielded more than 3 per cent. However, since then, it has meandered below the 2 per cent threshold, suggesting that investors are very nervous about something and are looking to bonds as a store of safety. (As bond yields fall, bond prices rise.)
As MarketBeat points out, there is one other explanation: Federal Reserve monetary actions are holding down bond yields below levels where they would normally be. But it also notes that the bond market has had a tendency to be right in recent debates with the stock market, with stocks falling in the spring of 2011 and the early autumn after the bond market signalled trouble ahead.
And let’s not forget when the bond market inverted prior to the 2000 bear market and the 2008 financial crisis – with short term bonds yielding more than long-term bonds. Both times, the stock market seemed giddy even as bonds predicted big troubles ahead. Will this time be different?
Disclosure: None
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