The Bond Market, Fed, Coronavirus And Recession

While the wild gyrations of the stock market usually capture the lion’s share of attention; something beneath the surface was happening in the bond market as a result of Coronavirus (COVID-19) pandemic.

Why Is The Bond Market Important? Personally, I track the Bond market more closely than the stock market due to the fact that the underlying data tells a much different story with respect to health of the economy.

The Bond market is more efficient due to Bond ratings, interest rate derivatives, credit worthiness, publication of bond-yield curves, spreads and the predominance of long-term institutional investors.

Stock Market vs Bond Market Performance The returns for the Bond market over the last 40 years has been insane. Every time we believe we have reached a floor with respect to rates; they still go lower.

Will The Bond Market Crash?

A falling interest rate environment in most of the developed world has resulted in spectacular returns for bonds. In fact, in the last 40 years you would have received the same returns investing in the 30 year bond as with investing in US stocks.

Bond Market Future Performance? Before the March 15th, 2020 cut; the intermediate term Treasuries (average duration of 7-8 years) had around 3% upside if the 10 year yield goes all the way to zero.

Will Inflation rise in the future as part of the Fed action? Effect of Fed Reserve Requirements The most under reported part in the Fed announcement which went unnoticed was that the reserve requirements have been cut to zero. This could have massive ripple effects depending on how aggressive the banks get.

Deglobalization effect on Inflation As part of the COVID-19 (Coronavirus); the world has realized the extent to which it is dependent on China for manufacturing. Everything from masks to gloves to personal protective equipment (PPE) is manufactured in China. Even medicines depend on chemicals which are manufactured in China.

Is Bond Market Predicting Inflation? Based on the precipitous drop in yields; I would have expected the stock market to be a lot lower. We can see inflation all around us now.

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