What do bond traders know about the world economy that other investors are missing?
That’s what’s puzzling David Woo, head of global rates and currencies at Bank of America Corp. in New York.
Fixed-income investors are running for the exits with long-term U.S. Treasuries tumbling on the bet the U.S. economy is almost strong enough for the Federal Reserve to raise interest rates. Meantime, German 10-year bunds are yielding more than when the European Central Bank began quantitative easing.
All told, the worldwide dumping of bonds has been so violent that the increase in 10-year rates of major markets in the second quarter was the biggest since the so-called taper tantrum of 2013, according to Woo.
“Both the global nature of the recent bond sell-off and the sharp increase in real yields suggest the rates market is turning more optimistic about global growth,” he said in a report to clients on Monday. “The million-dollar question is whether what appears to be increasing growth optimism among rates investors is justified.”
To economists at Morgan Stanley, JPMorgan Chase & Co. and Credit Suisse Group AG, the trade is likely well-founded as they predict the world economy will accelerate in the second half of this year. The optimistic case is bolstered by this week’s Greek bailout agreement and the consensus view that the recent rout in China’s stock market won’t derail its economy let alone those of elsewhere.
What concerns Woo is that not every market shares the optimism of bond investors, especially the transportation sector, which should be closely linked to the health of international demand.
China’s containerized freight index is down 40 percent this year and below the trough reached during the euro-area’s debt crisis of 2012, according to Woo. A BofA gauge of sentiment among truckers is also weakening, while U.S. rail stocks are down about 20 percent with total carloads contracting.
“In sum, what the transportation market is telling us is that global trade growth is weak,” said Woo in his report titled “Who do you believe?”
Much may depend on China with Woo arguing it’s reasonable to assume a further moderation in its expansion will have international repercussions given it accounted for a third of global growth over the past three years. His colleagues say the equity slide could hurt the world’s No. 2 economy by sapping confidence in the government’s ability to manage it and making it hesitant to use even more monetary stimulus.
Moreover, transportation may not be alone in flashing an alert, nor Woo the only analyst. Nickel, copper and aluminum fell to the cheapest in six years on the London Metal Exchange last week, while oil’s rebound form a six-year low in January has also faltered.
“Anyone might think we were in the midst of a global growth slowdown,” Deutsche Bank AG analysts said on Friday. “Just some passing data turbulence or something more sinister?”