Monday, June 16
The bond market isn’t buying the recovery. Stocks are recovering as Treasury yields keep rising.
The recovery in equities since early April has been impressive, driven by the U.S. pulling back from a global trade war. As of this writing, the S&P 500 is up for the year after a 20% drop in April.
But the bond market sees something different.
Instead of yields falling as equity valuations recovered, the fixed income market has focused on the foundation of the trade conflict. That includes unimpressive revenues from trade taxes and the growing probability that tax legislation will feature a large tax cut funded by government debt.
Given the risk to the economy (a recession is still in play) and the recovery in equity markets, bond yields should be falling. They aren’t. It’s because fixed income investors are sniffing out the logic of economic populism amid a move towards trade protectionism, which strongly implies higher inflation and rising long-term yields.
Of course, that means additional compensation demanded by investors for holding Treasurys (known as the “risk premium”). Yields jumped over the first two weeks in May. And if Congress approves a large, unfunded tax cut, don’t be surprised if the bond market pushes yields back toward mid-April highs.
If investors are looking for a reason to “sell in May and go away,” the bond market might be it, given the plans of the fiscal authority, trade, and tax policy.