Monday, July 6
Stock investors have been enjoying a multiyear bull market. Meanwhile, bond traders are selling, meaning they see trouble.
Why does this difference matter? Well, historically the bond traders are often right when there’s this kind of disagreement.
Since 2024, U.S. stocks have surged 58%. During the same period, an exchange-traded fund full of long-duration bonds – the iShares 20+ Year Treasury Bond ETF (TLT) – has fallen 13%. As a reminder, when bond prices fall, yields go up.
Even worse, last month the 30-year Treasury bond yield briefly reached its highest level since the Great Financial Crisis. Bond traders effectively rejected the current rate of compensation for U.S. debt, dumping bonds in preparation for more risk and higher rates ahead.
The message is clear: bond investors have serious issues with U.S. markets.
But Treasury bonds are facing other bearish factors too.
Namely, America’s debt is out of control. Servicing the interest costs $1 trillion a year, which is undermining confidence in America’s long-term viability.
Central banks know this. The biggest buyer of U.S. Treasurys, the Federal Reserve, is no longer buying. Foreign central banks also buy our bonds, but they’re losing confidence in these assets. For instance, China and Japan are diversifying.
With bond demand falling, it’s logical to think bond prices could keep falling too.