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When investors are optimistic, they lose interest in the safety of bonds and sell them so they can buy stocks, which are riskier but offer higher returns.
When a lot of people sell bonds, bond prices fall as supply is greater than demand. As a result, bond yields go up to attract investors.
Conversely, when investors see economic clouds on the horizon, they flee stocks and shift money into bonds, considered a relatively safe place to protect value during economic storms.
In those scenarios, bonds offer lower yields because demand is stronger than the supply.
As a general rule, bond yields and prices move inversely to each other.
Early this month, yields on the 10-year treasury note fell to 1.13 percent, the lowest since February.
Translation: more investors are taking refuge in bonds as they grow more anxious about the economic future, the Wall Street Journal reported.
“The market seems to be worried that growth is at risk because [the rise in COVID cases] is going to lead to restrictions,” James Bianco, president of advisory firm Bianco Research, said to the WSJ.
The T-note’s yield plunge highlights a dramatic reversal of market sentiment, which pushed the yield to 1.74 percent on the last day of March.
Now the Delta variant has arrived, frightening more people back into their houses and forcing many businesses to reconsider future plans to rehire and return to business as usual.
Government spending and the U.S. Federal Reserve’s low interest rates and bond-buying have done much to keep the economy afloat and stock prices at or near record highs.
“You’re seeing a lot of people say, ‘I can’t buy bonds [because the yield is so low], so I have to buy equities [to make a decent return]’,” Amy Raskin, chief investment officer at Chevy Chase Trust, said in a WSJ interview.
However, the bond market is seeing a darker future as Portugal has imposed curfews at popular tourist destinations, China threatens Draconian lockdowns, and virus infection rates climb across manufacturing hubs in Japan, South Korea, and Vietnam.
“Setbacks in Asia could spill over to the U.S. at a time when supply-chain disruptions are already the most severe and widespread in decades,” Goldman Sachs analysts wrote in a research note earlier this month, cited by the WSJ.
Supply-line glitches already were slowing the U.S. growth rate below what the bank had predicted earlier, the note said.
Also, investors see an end to generous government stimulus spending: federal unemployment benefits are ending, Congress is more reluctant to enact new debt, the federal government will make no new rescue payments to individuals, and the payments made already have largely been spent, the WSJ noted.
PUBLISHER’S NOTE: The bond market will provide a more reliable “canary in the coal mine” than stocks to give an early signal of the onset of a bear market.