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Expand chart
Data: Treasury; Chart: Chris Canipe/Axios

The S&P 500 has risen more than 8% in less than a month and a half this year, but the benchmark 10-year Treasury note is almost unmoved from its Jan. 1 levels. That's a reversal from 2018 when bond yields jumped in tandem with stock prices.

Why it matters: That's because the current rally in stocks is not based on positive growth expectations for the economy, says BMO Capital Markets interest-rate strategist Jon Hill, but on expectations that the Fed will not raise interest rates. There's no faith in long-term growth or inflation.

What it means: This disconnect between stocks and Treasury yields reflects "the extent and speed and depth of the U-turn the Fed executed between December and January," Hill tells Axios.

  • The biggest catalyst was not necessarily the Fed's calls for patience, but the fact that central bankers removed all guidance surrounding when they would raise rates again. That suggests to the market that not only is the Fed unlikely to raise rates this year, they may have reached the conclusion of the hiking cycle started in 2015.

The big picture: This makes sense given that despite President Trump's tariffs on $250 billion worth of Chinese goods and a historically low U.S. unemployment rate, inflation has hardly budged. Both major metrics — CPI and PCE — were right around the Fed's 2% target in 2018. In fact, prices fell in December.

  • That puts the Fed in an interesting position. If economic data does start to improve and suggest inflation could rear its head, the Fed will need to raise interest rates.

But: "Even if the economy gets better in the short term, longer run growth and inflation expectations aren’t going to change," Hill says.

  • If longer-dated Treasury yields don't move and shorter-dated yields do because the Fed is hiking that will lead to a yield curve inversion, which has preceded every U.S. recession since 1955, with a lag time ranging from 6 to 24 months.
  • "Ironically," says Hill, "the Fed owns the inversion."

Go deeper: The market rally that could signal a coming recession

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