Bond market says a recession is coming and the Fed will cut prices
The bond market doubled on scary warnings Monday, signaling both a possible recession is threatening, and the Fed may have to cut interest rates this year to stop it.
" People start to get scared, "said Andrew Brenner of the National Alliance." It won't be long, but they are scared of a recession. You had a Fed that changed course 180 degrees and then added it last week. It was taken off the market. "The link between stocks and bonds was quite dramatic Monday after the bond market flashed a recession warning Friday. Dow traded as much as 1[ads1]00 points on both sides of unchanged Monday, but the bond market reflected a flight to the security deal, with dividends falling over the curve. Dow ended 16 at 25,516, while S & P 500 fell 2 points to 2,798.
The movement was also global, with the German 10-year return falling to 0.3 percent. [19659003] At the same time, there were many measures in mathematical futures, where traders are betting at least a 25 basis point cut from the Federal Reserve this year and more than two next year, which is a big change from the end of last year, when the market still expects interest rates to rise and the Fed was forecast three.
On Friday, the markets were spooked when the yield curve reversed, a reliable recession saying Gnal but usually not an instant. on an instrument with a lower duration, the safety yield increased over a longer period. In this case, there was a 3-month dividend yield of 2.44 percent on Monday, and moved over a 10-year return, which dropped as low as 2.38 percent, a more than 2-year low. Dividend moves the opposite price.
In another sign of anxiety, the hits also saw a 10-year dividend on Monday when there was less than 2.40 per cent, about where the food funds are. The 2-year-old, at 2.24 percent, was well below this level.
"The decade is inverted to today's meager funds. It should signal expectations that prices will be lower in the future, which will be consistent with the remarkable risk of a recession," says Jon Hill, US interest income to BMO. Of the fascinating things is that the stock market takes this in conflict. The Fed is trying to extend this cycle as long as it can. "If that is enough, it's hard to say."
Source: Wilmington Trust
However, Hill said that some of the features of the market Monday were more about technical signals and short presses than real fears of recession. The Fed changed the tone of markets substantially Wednesday, as it was even more tough than expected, and cut its forecast to just one for this year from two.
Chicago Fed President Charles Evans was also on the move when he said on Monday that the Fed could hold or even loosen the policy.
Fed Wednesday released a new forecast of no interest rate increases this year from two earlier, but the market had already been pricing six base points with simplicity this year. After the meeting, it moved to a price of 19 extra base points, or at least 25 basis points cut this year, according to Hill.
"As far as the recession is concerned, the economist feels quite optimistic that a recession will be avoided, at least this year. The market focuses not only on American fundamentals, but also on what is happening in China, what happens in the rest of the world, And how likely is it that political uncertainty, whether through trade policy or what, how likely it is to continue and attain a recession, says Mark Cabana, head of short USrate strategy at Bank of America Merrill Lynch.
Strategies said The curve inversion does not necessarily mean that a recession is coming, but it can. Shares have also historically done pretty well immediately after such a move.
"As recession signals begin to flash and the decline probabilities increase, I expect market participants and people who distribute capital will be more cautious and there is a danger that it is a self-complete prophecy, "Cabana said.
Brenner said that 10-year returns ing comes before itself, but at present it is still cold, lower. He said the market was bracing for around $ 350 billion in new US debt this week in both notes and bills.
"We have the cheapest prices for a long time. You are in the last week of the quarter plus it is Japanese year. All things that affect it will not affect the next week," said Brenner.
