Some may doubt that a recession’s coming, but the bond market has already made up its mind.
The yield on the benchmark 10-year Treasury sunk to 3.85% yesterday, the lowest in three years. The rush to buy bonds, and thereby lower yields, reflects the growing sentiment that more trouble awaits the American economy. In short, fixed-income investors couldn’t be happier.
The sharp drop in yield brings up the subject of whether the previous low might be revisited. Back in June 2003, the 10-year yield briefly dipped to 3.07%. The dramatic fall in the price of money at the time inspired forecasts that the 3.07% would stand as the low mark for a generation or more. It sounded like a plausible argument at the time. Indeed, a month later, in July 2003, the 10-year yield reversed course and closed the month at 4.47%.
As for today, it’s any one’s guess if a similar rebound is coming any time soon. Meanwhile, the bull market in bonds has boosted fixed-income weights this year. Investors who shunned bonds earlier have paid the price. With U.S. equities suffering, debt has lived up to its traditional reputation as a potent diversification tool.