Bond market is trying to tell us something
It was open house day. Four years ago, my son Sam graduated from Andrean. In typical Sam style, he wanted the big graduation party. After weeks of yard work, probably doing more than any guest would ever notice, game day had arrived.
I was out in the barn at 7 a.m., chairs and tables were being delivered to be set up, banners hung, coolers filled, and Scooters BBQ was arriving at 10. Inside my wife finished up the side dishes and desserts. We were ready for a crowd and hoping they would show.
It was a beautiful day, temps in the high 60s and partly sunny. The crowd did not disappoint. Around 9 p.m. guests started to leave, at 10 p.m. a couple friends helped me fold up tables and chairs and clean up the food before they left. Around 11 p.m. I went inside and sat on the couch. It was immediate lights out.
Sometime later, as I was asleep on the couch, my wife Tracy shook me awake. "Hey, you need to get up and do something," she was saying. "With what?" I responded crabbily. "I'll come to bed in a minute." (She gets annoyed when I sleep on the couch.)
"With the party!!" she exclaimed. "Seriously? The party's mostly cleaned up, I'll do the rest tomorrow," I mumbled, annoyed. "Not the clean-up," she chimed back, "the party's not over, and you need to do something."
It was at that moment, now mostly awake, I realized the screen porch where I was sleeping was subtly vibrating to thunderous bass "music" coming from the barn. I sat up and looked at my phone, and then out the window. It was 2 a.m. and a huge bonfire was burning in my yard. Teenagers, dozens and dozens of teenagers, were everywhere. My blood pressure spiked, I grabbed my shoes next to the couch and headed toward the door thinking about my poor neighbors. Now this party was over.
In the world of capital markets, the stock market is without a doubt, the teenagers. Volatile, moody and difficult to understand. Stocks can be a pain in the neck. Like parenting teenagers, managing stock portfolios requires lots of attention, patience, understanding and after 31 years of work in this arena, I dare say, hard earned wisdom is the most important tool. Stocks, like teenagers, take focus and energy. The last month and a half more than proves my point.
In the world of capital markets, however, if the stock market is the teenagers, then the bond market is Dad sleeping on the couch. The bond market is where the adults are, and when the bond market decides to get up and make a point, professional investors pay attention. Last week the bond market didn't just get off the couch -- it came out to the barn party with a vengeance.
The primary benchmark driving the bond market is the 10-year U.S. Treasury bond. This benchmark security sets the tone for a whole array of financial instruments and strategies. Professional investors watch the "10 year" as closely as they watch the Dow or S&P 500. Last week, seemingly overnight, the yield on this benchmark security moved from roughly 4% to 4.5%. While this may not seem like a huge move, I would analogize a move of this scale being roughly equal to the Dow Industrial Average losing eight to ten thousand points overnight. A big deal.
Because the bond market is not prone to short term volatility of this magnitude, stock markets were also roiled by the move in yields. Tariff talk was certainly posed as a source of this stress in the market, but the question had to be asked -- was there something more stirring the markets?
We've all heard about the risk presented by so much of U.S. federal debt being held by foreign nations such as China and Japan. While these risks can seem obscure, like tornados and hailstorms, it doesn't mean they aren't real and don't sometimes manifest into disastrous reality.
Was this move in U.S. Treasury yields a result of one of these large trading partners sending a signal, by selling U.S. bonds, during tariff negotiations? Was it a sign of deteriorating liquidity in the markets or banking system? Was the bond market questioning the stability and credit worthiness of the United States?
The bond market usually demands higher yields during periods when faster economic growth and inflation are anticipated, and U.S. Treasury yields typically move lower during periods when recession is forecast or occurring. Bond yields go down when bond prices go up, and Treasury bond prices rise when investors buy them for their safeguard status. None of this conventional logic fits the yield move being experienced. The move remains an enigma.
Bond market stress tends to be lower profile until it isn't, and by the time bond stress boils over into the stock market a lot of damage has typically already occurred. The 10-year yield is telling us something -- it's time to go outside and take a look.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
