Bond Market is Pricing a Recession, 10-Year Treasury Breaks 2% Yield Intraday

Two charts below show a rather alarming and decisive signal from the bond market.  The signal is the stock market is about to crash.  Today the 10-Year Treasury Yield broke 2%.  This follows a 5-Year note below 1% and the 1-Year note below 20 basis points.  Bond holders are not being rewarded much in nominal terms, which generally indicates that deflation is on its way.  The only thing I cannot reconcile is the recent strong performance in TIPs, or Treasury Inflation Protected Securities.  That said the bond market is pricing in a recession, and last time this happened, it took about 6 months for the equity markets to bottom.  Since we are going into an election year next year, which is traditionally bad for markets, and since the world is totally upside down anyway, odds of this being a dramatically terrible selloff in equities is quite high.

A saving grace could be how cheap it is to short US Treasuries.  One would think the carry trade would support asset prices, but we are not seeing that.  Although anecdotally one could guess the strength in the 10-Year and the 30-Year is being supported by a long-short treasury trade. where traders are short the front of the curve and long the mid and long ends, picking up a fairly risk free spread.  When Ben Bernanke committed to keeping short term rates low for two years, he effectively gave carte blanche for the market to arb the spread between the short and and the long end.  I suppose when risk assets get cheap enough, we will see a dramatic selloff on the long bond, as people run back into equity and credit risk.

There may be no better time in our lifetimes to refinance or take out a mortgage!

Bloomberg: 10-Year Treasury Yields vs S&P 500 Index, August 18, 2011

Bloomberg: 10-Year Treasury Intraday Yields, August 18, 2011

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