Bond Market's Message Is Clear: Slow Growth Ahead

The bond market continues to scream that a slow growth, low inflation economic environment is on the horizon. To illuminate our observation we turn our light on the 2 year and 10 year futures market.

2 Year Treasury Note Future – Daily Chart (Click to enlarge)

Over the last five days, 2 year Treasury Note futures have been trading lower in what could be classified as a minor correction. In the mean time, the 10 year Treasury Notes have caught a significant bid.

10 Year Treasury Note Futures – Daily Chart (Click to enlarge)

The net result of this price action is a yield curve that is flattening. As measured by the 2yr-10yr spread the US Treasury yield curve has flattened almost 20 bps over the last month. To be sure, the curve is much steeper than a year ago and is still quite steep on a historical basis. However, a flattening curve is the first sign of impending economic sluggishness.

(Click to enlarge)

Bond investors are feeling more comfortable with the idea of U.S. rates remaining low and inflation staying in check. In fact, they feel so comfortable that they are reaching for yield by purchasing the long end of the curve.

The message from the bond market is clear: expect a slow growth, low inflation environment. Perhaps the equity market reaction to Chicago PMI is the first sign that equity investors are starting to hear the message from the fixed income arena.

Disclosure: Long TLT and UUP

Comments

[Aldebert:]

Low inflation? Maybe so, but the real return on 20 year TIPs tightened to 2.02% and 10 year to 1.56% as of yesterday. For those of us planning to participate in next week's auction, that's too bad.

Oct 01 09:21 AM

[Old Trader:]

Once again, the bond market is in contradiction with the equity market, which seems to see trees growing to the sky. (Fwiw, my money's on the bond market being correct).

Oct 01 09:22 AM