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The Bond Markets Is Sending A Signal: Manipulation

March 14, 5:00 pm EST

Wall Street has a lot of adages that many follow, and few question (but they should).

One of them:  The bond market is smarter than the stock market.

The logic is that bond market investors are better and quicker at interpreting news and information than stock investors.  As such, the belief is that bonds will be pricing in the more probable outcome before stocks.

So, is there a signal to be taken from the behavior of the 10-year yield?  While stocks have fully recovered the losses of December, you might expect the bond market to reflect the ease in uncertainty (i.e. moving back higher, along with stocks).  But bond yields are back near the lows of early last year, and appear to be pricing OUT some (and threatening to price out all) of the optimism that followed the Trump election.

 

With that, at 2.60% on the U.S. 10-year government bond yield (a global benchmark interest rate), is there an element of worst-case scenario for the global economy being priced in?  I’d say with the U.S. economy growing at 3%, and stocks at these levels, even when the 10-year was at 3.25%, bonds were (to some degree) pricing the worst-case scenario.

So, why are bond yields as low as 2.60%?  Smarter market participants?  No.  It’s intervention/manipulation.  Sure, the Fed has put the brakes on its policy direction.  The ECB has reversed course on policy!  China is easing.  But, most importantly, the Bank of Japan is still executing on an unlimited QE campaign.

The Bank of Japan’s yield targeting policy gives it the license to buy unlimited assets.  They have been and will continue to buy U.S. government bonds, and they continue to be the anchor for global interest rates.  And it’s safe to say, they are acting with plenty of coordination with the other major central banks in the world (namely, the Fed).

Bottom line:  The interest rate picture is signaling one very clear action.  The Bank of Japan is still engaging in full throttle QE. 

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Bryan: