In the $23 trillion Treasury market, a traditional economic alarm is getting louder and louder, but Wall Street is at a loss.
Real yields in both the US and Europe have hit record lows over the past week as novel coronavirus's delta variant spreads, often seen as a warning of threats to the global economic recovery.
However, given that the Fed buys $120 billion of bonds a month, the epidemic distorts data and market movements, and other technical factors make it impossible for even Fed Chairman Jerome Powell to figure out what's going on in the Treasury market these days.
More importantly, after the stronger-than-expected US jobs report, market sentiment began to improve and interest rates began to rise again. The yield on 10-year inflation-protected Treasurys hit as low as-1.22% this week, but rebounded to-1.05% on Friday.
Bank of AmericaAnd Shengbao Bank are puzzled. BlackRockTen per cent of fund managers see this as a hint to rethink inflation. Investors in Medolanum International Fund believe this is a good sign for the stock market, even if valuations are high.
"when and how to solve the riddle of extremely negative real yields could have a significant and wide-ranging market impact," said Athanasios Vamvakidis, head of FX strategy at Bank of America Gmur10.
The failure to interpret the latest implication of yields is a disturbing development for policy makers, who have always regarded indicators such as sovereign debt movements and "Dr. Copper" as economic bellwethers.
In addition, it increases the risk for fund managers. They have poured money into growth-sensitive assets, from cyclical stocks to high-yield credit.
"financial repression"
James Athey, investment director of Aberdeen Asset Management, said that "the level of real yield today is largely financial repression," and the decline in nominal interest rates is a key factor. "the whole market is so distorted that everything needs a strong dose of medicine."
The mystery, according to Bank of America's Vamvakidis, is that real yields continue to fall this year, even as the world begins to recover.
Of course, the signals from bonds do not match growth forecasts, and rising risks are a feature of the post-financial crisis era, prompting many to ignore their relevance in predicting the outlook for consumption and investment cycles.
"it has been shown this year that it is easy to fall into a cycle of generalization, miscalculation and feedback when using financial markets as forecasts for the real economy," said Jamie Stuttard, global head of macro fixed income at Robeco. He increased his bet on the steepness of the European yield curve to benefit from economic growth.
Whatever the real economic signal, one thing is certain: the level of real yield is crucial to investors. Given the possibility of losing money on investing in government debt, fund managers have been putting money into riskier assets for higher returns, driving a surge in cross-asset valuations.