The steady fall in Bond yields is sending out a signal that all is not well in the world. The tail end of last week may have seen some excellent earnings from FANG stocks. Facebook, Apple, Amazon, and the Alphabet all exceed market expectations and that started afresh equity rally early Friday. However, the fall in Bond yields is sending out a warning signal saying, ‘Warning there may be trouble ahead!’. Remember that bond traders tend to take a more long-term macro view. So, when equities are rising but bond yields are falling that is a signal something is wrong. One market is out of step with the other.
History repeating itself?
At the start of the year, one of the big questions was which market is correct? Is the pessimism over falling bond yields correct or is it the optimism from rising equities? The answer was, ‘the falling bond yield market’. The general rule of thumb is to go with the bond yield market. This is because bond traders tend to have more of a longer-term global macro view. Now, of course, this doesn’t mean that a funny divergence can last for weeks and months. However, at the very least it is a warning sign. That warning sign is showing again on the chart below.
Yields are dropping
The 10Y Gilt yield (UK bond) hit a record low last week. The 10Y Bund (German bond) closed at its lowest level since mid-May on Thursday last week, while the 10 y UST (US bond) was down towards its lowest ever close last week too.
Why are they dropping?
It’s all to do with the second wave of COVID-19 being seen ahead. So, yes the equity market has been rallying on the central bank support. However, the bond market is saying that the next stage of the global economy is fraught with dangers and a ‘V’ shaped recovery is more of a vague hope than a present reality.