May 29, 2019
It’s already been a big week for red flags in the bond market after the Fed’s most reliable recession indicator, an inversion in the US Treasury 3 month-10 year spread, led a rush to the safe havens of sovereign debt. See https://bit.ly/2BRqa4l . Yields are down everywhere, even hitting record lows in both Australia and New Zealand as negative effects of slowing growth and the US-China trade war intensifies and broadens. Globally almost $13 trillion of bonds now trade at a negative yield, meaning you have to pay the issuer for the privilege of owning them. Nuts, but a sign that investors are becoming more concerned with the return of capital rather than the return on capital. See https://bit.ly/2Wd91M1 .
The panic is starting to spread to the equity and credit sectors as two of the markets’ worst fears come into view. As we have noted repeatedly here, the possibility of 1) a higher dollar and/or 2) corporate credit downgrades remain the greatest threats for 2019 because of the destructive potential that both outcomes hold for a global financial system leveraged up on dollar debt. See “Rates Headed South for the Summer” and “Time to BBBe Careful“. These are the pain trades that central banks will find hard to mitigate and action in the bond markets is telling investors that they should indeed be worried.