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Investors wonder if bond market’s capitulation this week is giving


Bond investors stayed pessimistic on the U.S. economy’s prospects for most of this year as the coronavirus pandemic swept around the world, even as the stock market recovered from its late March lows, but even U.S. Treasury traders are now seeing signs of light at the end of the tunnel, sending yields up sharply this week.

The rise in yields is raising questions among some on Wall Street about what a bearish bond market portends for the stock market’s trajectory in coming weeks, amid worries that the S&P 500 index’s spectacular rally from its March 23 lows is becoming overextended.

Investors mostly suggest rising yields are bullish for equities as bond buyers finally come around to the stock-market’s view that efforts to restart business activity closed down by the pandemic will allow a robust U.S. economic recovery to take hold this year.

Up to this week, the stark divergence between high-flying equities and depressed bond yields was undermining investor faith in a further rise in risk asset prices which have already mounted substantial gains in the past few weeks.

“Something had to give. Either risk assets had it all wrong, or rates were too bearish on the economy. Now it seems the rates market has begun to creak,” said Padhraic Garvey, regional head of research at ING, in an interview, noting the bond-market was last to join in the reflation narrative, with beaten-down emerging market bonds and equities showing inflows last week.

For the week, the Dow Jones Industrial Average
DJIA,
+3.15%

rose 6.8%, the S&P 500
SPX,
+2.62%

gained 4.9%, while the Nasdaq Composite
COMP,
+2.06%

advanced 3.3% and the Nasdaq-100
NDX,
+2.02%

rose 2.8%.

The 10-year Treasury note yield
TMUBMUSD10Y,
0.901%

rose 8.5 basis points Friday to end at a ten-week high of 0.90% on Friday, and may be on its way to hitting the 1% level. At the end of last week, the benchmark’s yield stood at 0.65%, in comparison.

See: Here’s another reason for the stock market rally — the U.S. dollar’s ‘almost silent slide’

After all, bond investors usually take pride in being better prognosticators on the twists and turns of U.S. economic growth, more so than their eternally cheery counterparts in the equities market. This characterization of savvy bond traders may have taken a hit as expectations for a growth rebound show up across several corners of financial markets.

The stock-bond disconnect in part reflected concerns by Treasury investors as to whether the trillions in financial assistance approved by Congress and the Federal Reserve would be enough to reflate the economy.

The U.S. government has injected some $3 trillion in fiscal stimulus into the economy, while the Federal Reserve’s balance sheet rose to $7.21 trillion as of June 3, amid efforts to mitigate the severity of the…



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