A Total Disconnect

There’s a clear disconnect between the US equity market and the bond market. Both interpret the Fed’s recent comments very differently.

Equity markets are happy and hopeful for more stimulus to come, no more balance sheet reduction and maybe rate cuts ahead. The party can continue! The bond market on the other hand is sending a warning signal. If we need more stimulus, the economy is probably not as strong as investors think, and a slowdown could be much worse than what investors expect.

So, who’s right? We think it doesn’t really matter…

When equity valuations are very high and yields are collapsing all over the place, both in the US and in France, in Germany where the 10-year Bund yields are at negative territory, and in Japan where the 10-year is actually lower than the Bund’s, it is time to take risk off the table. The risk reward is not in your favor. No bull market started from an inverted yield curve.


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