Fund Spy

3 Lessons From the Bond Market

Eric Jacobson

Does the sell-off in stocks and bonds signal a recession? Maybe, but as economist Paul Samuelson observed, market indexes have predicted nine of the past five recessions. The truth is that even those with a strong record are bound to have exceptions and surprises. When worries over housing markets were building prior to the 2008 financial crisis, they were dismissed as uninformed because local housing markets around the country had always moved independently of each other. It's worth keeping that in mind as others argue that a nascent yield-curve inversion will prove a better recession signal than Samuelson's market indexes. A few other reminders:

1) Until recently, it was obvious that Treasury yields were on the verge of rising out of control.
Panic over the fallout from massive monetary and fiscal stimulus to rescue the economy and banking system took hold almost immediately at the end of 2008 as pundits predicted that we were heading for a catastrophe. The bond market has arguably been a lot calmer than the pundits, but that panic led to fear of soaring Treasury yields. By April 2010, the yield curve implied that they would hit around 5.5% five years hence. Needless to say, they didn't. Nor did the market's expectation five years ago come true that 10-year yields would be higher than 4.5% by today. (They finished Dec. 7, 2018, at 2.85%.)