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Bonds Tell The Real Tale For U.S. Economy

Clif Droke profile picture
Clif Droke


  • Bond market doesn't share stock market's concern over U.S.-China.
  • Municipal bonds in particular are reflecting a strong economic outlook.
  • High-quality corporate debt market points to bullish financial conditions.

Fear returned to the financial market this week as investors worried that a March 1 trade deadline for the U.S. and China wouldn’t be met. This resulted in a spike in stock market volatility and a pullback in the major U.S. averages. While many participants fear a worst-case scenario, the bond market is sending a bullish message for the financial market outlook. We’ll take a look at these positive aspects in today’s commentary.

After Thursday’s stock market slide based on renewed trade tariff fears, investors were left wondering if another major plunge in the S&P 500 Index (SPX) is in the offing. This was nowhere more evident than in the 6.44% jump in the CBOE Volatility Index (VIX), which is Wall Street’s favorite fear gauge. Are investors correct to worry about the integrity of the stock market’s recovery since the Dec. 24 bottom in the SPX? And will the U.S.-China trade dispute result in a weakened global economy? As I’ll explain, both these questions can be answered in the negative.

One reason for not fearing a worst-case scenario for the U.S. is the bond market, including government, corporate and municipal bonds. All three aspects of the market are reflecting calmness and a conspicuous lack of concern about the intermediate-term (3-9 month) outlook. The CBOE 10-Year Treasury Note Yield Index (TNX) is a good place to start, since this reflects the prevailing interest rate trend. As can be seen in the graph below, TNX remains far below its October peak and shows that interest rate pressures aren’t a concern among traders right now.

CBOE 10-Year Treasury Note Yield Index

Source: BigCharts

The 10-year Treasury yield is an extremely important factor to consider when evaluating the equity market and economic outlooks. It can be argued that interest rates have in fact been the primary concern of investors since last

This article was written by

Clif Droke profile picture
Clif Droke is an equity research analyst and writer for Cabot Wealth Network. He has covered equities and commodities, specializing in gold, since 1997 and is the editor of the Cabot SX Gold & Metals Advisor.

Analyst’s Disclosure: I am/we are long SPHQ, IAU, VCSH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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