Stocks’ Bull Case Is Undermined by Boring Bonds

The big rebound in stocks since late December has captured the bulk of investors’ attention, while the bond market has largely been treated as an afterthought. That’s not so surprising, given that monitoring U.S. Treasuries has been about as exciting lately as watching paint dry. But the fact that Treasuries have done little while equities rally speaks volumes about where the economy is likely headed.

The Bloomberg Barclays U.S. Treasury Index puts the average government debt yield at 2.68 percent, exactly where it was on Dec. 24, the last trading day before the S&P 500 Index began a turnaround that has seen it surge 12.5 percent. But rather than signaling that the bond market is being overly pessimistic about the economic outlook, it could be more of a sign that the stock market reflects undue optimism. Take the Conference Board‘s January report on consumer confidence, which was released Tuesday. It showed the biggest two-month decline since 2008, falling 16.2 points over the course of December and January. The optimists might say that the drop was likely due to the government shutdown. Plus, even with the falloff, confidence remains at historically high levels. True, but optimism was also elevated going into each of the last three recessions. Furthermore, the expectations portion of the Conference Board’s index fell to its lowest since October 2016, wiping out any gains that may have been related to the Trump administration’s tax cuts and other economic policies. That brings us back the bond market. The Merrill Lynch MOVE Index, which tracks expected volatility in the $15.3 trillion market for Treasuries, has fallen to some of its lowest levels of the past year, suggesting traders don’t see any big change in yields on the horizon.