Thursday, October 7, 2010

Bond Markets Are Screaming Deflationary Depression

Bond market investors are much smarter than equity market investors, so changes in interest rates will often lead changes in equity prices - as shown this graph of the S&P 500 compared to the yield on the ten year Treasury note.

For example, the yield on the ten year Treasury (TNX) peaked in summer 2007, and the equity market followed in October 2007. The yield bottomed at the end of 2008, several months before the equity market bottom in March 2009. Then it peaked again in April 2010 and has dropped like a rock.

Locking in a 2.38% nominal yield for 10 years means that fixed income investors expect deflation and depression. Either they are wrong, or equity investors are.

And, everywhere you go, people are apoplectic about a bond bubble, but totally sanguine about the rocketing share prices of overlevered and unprofitable consumer discretionary companies.

I prefer to side with what the treasury yield is saying.

1 comment:

Taylor Conant said...

Could the bond market be wrong if the prices are simply responding to implied/actual Fed support?