Investors Should Heed the Warning From Treasuries

U.S. equities responded to the Trump presidency with euphoria. The Dow Jones Industrial Average rose 25 percent in 2017, becoming one of the best-performing global asset classes. It was a different story with U.S. Treasuries: The yield on 10-year notes fell slightly from 2.44 percent at the end of 2016 to close 2017 at 2.41 percent. And the spread in yield between two-year and 10-year notes, often a signal of slowing growth or forthcoming recession, plunged from 125 basis points to 51.8 basis points at year-end 2017.

As they receive different messages from equities and Treasuries, investors should pay particular heed to the bond market in making asset-allocation decisions for 2018. Treasuries have been a better predictor of the two recessions in the 21 century -- the first lasted from March to November 2001, and the second from December 2007 to June 2009. In the case of the latter, yields plunged during the months before the recession whereas equities remained strong well into the first half of 2008 when the economy was already in a downturn.