Hearing The Warning Bells Of The Bond Market

Warning Bells Of The Bond Market

The financial news media love the drama of the stock market, often at the expense of equally important financial news — the bond market. True followers of the financial markets and smart economic analysts know there is much more than just stocks. They realize the true value of the bond market as an economic indicator.

The frightening truth is that the bond market is like a blinking red warning light about our future economic situation. It is signifying a potentially harrowing road ahead for a recession to hit within the upcoming year. Deutsche Bank analysts are predicting that there is a 50 to 60 % likelihood of a recession within the upcoming year. The Brexit or Britain’s pulling out of the European Union in late June was another grave sign.

The reason that the stock market is a great dramatic ride for individual investors is that it can change direction for no reason, any reason, and sometimes specific reasons. It is not necessarily a predictor of anything. Yet, the trillions of dollars invested in the bond market are pinned to the direction of long-term interest rates and is rather steady. Bond prices are usually pegged to the growth outlook and inflation that is expected in the upcoming years. It is predictable.

The interest rates for the long-term that are in all of the leading economies are blinking disaster warning signals for the upcoming financial future. It would seem that inflation should not be a big bogeyman lurking in the shadows, and actually a non-factor. It would mean that unfortunately growth would remain weak. Many believe that this inability to increase interest rates for years is partly what caused Britain’s exit from the European Union.

Meanwhile, the U.S. yield curve is indicating that 60% chance of recession Deutsche Bank analysts identified. The long-term rate hit the record books dropping to the lowest rate in the history of the United States. Treasury Yield Curve

Consumer prices according to readings of the bond market are indicating that they will increase incrementally to 1.4% yearly through 2021. Even the five years beyond that will see only 1.5% increase annually. That means that the Federal Reserve will have to continue to keep interest rates low and even into 2017, there is a 50% likelihood of increasing interest rates.

For the worldwide leading economies, this means that the bond situation is worse than at first glance. The 10-year bond has — get this — negative interest rates in multiple countries, including even Germany, Switzerland, Denmark, the Netherlands, and Japan. Not only does it signify that purchasers of such securities are receiving fewer Danish kroner, Swiss francs Euros or Yen back than the put into their investments, this is a historic first. It is not a good first.

The world is in debt, the central banks may not print more money for fears of inflation problems, but with such low lending rates, it means money is inadvertently created and entering the system in a drastic volume through lending. When a bank is able to create a loan, it is in effect creating money that never existed in a sense, which is propped up by the central bank.

It is important to remember that many institutional investors, banks, insurance companies, and government employee pension funds are forced to limit risk and therefore by default invest in bonds. In addition, central banks have tossed money into the bond market to support the economy. For instance, the European Union has been pumping Euros into the bond market. The Federal Reserve Bank was dumping money into the U.S. bond market up until recently for the same reason but has already pulled back.

What this means is that while it would seem that the warning bells are ringing that may not be entirely true. As it turns out, there may not be such a sincere interest in investing in the bond market but that it is actually a consequence of institutions that are obligated to put money in bonds.