Oct 3, 2019

The stock market is overreacting

Stocks took a nosedive for the 2nd consecutive day on Wednesday and the Dow and S&P fell for the 4th time in 5 sessions. But the U.S. Treasury market experienced a far smaller move, as it has been factoring in manufacturing weakness and slowing job growth for months.

Why it matters: The bond market's limited movement in the face of historically weak manufacturing and deteriorating employment data suggests the worst may be over, analysts say.

What's happening: Bearish investors appear to have seized control of stock markets and are now pricing in the effect of the already-in-recession manufacturing sector. While the Dow fell by nearly 500 points on Wednesday, the benchmark U.S. 10-year Treasury note yield dipped just 5 basis points.

  • "The bond market has been more pessimistic about the economy than the stock market for a while, and really the only data that has come out particularly weak has been the manufacturing numbers," Tom Simons, money market economist at Jefferies & Co., told Axios.

Reality check: Jobs, consumer spending and the all-important services sector, which represents around 70% of the U.S. economy, have largely held strong.

  • "There’s certainly a lot of downside risks, but data suggests [the economy is] still growing," Simons added.

Between the lines: Treasury yields have been incrementally moving lower throughout the year as traders have poured into bonds, correctly betting that U.S. economic data would continue to weaken and the Fed would cut overnight interest rates and ease policy.

  • Stocks, on the other hand, have largely ignored the economic data, moving higher on positive trade war headlines, however thin, and hopes that monetary policy would boost business balance sheets.
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Data: U.S. TreasuryYahoo; Chart: Andrew Witherspoon/Axios

Historically, as U.S. stock prices rise, Treasury yields increase as investors sell bonds to buy equities. But that has not been the case over the past year.

The bottom line: With more important data releases to come this week, the stock market may continue to be volatile. But the Treasury market has proven a better representative of the real economy this year and may have found a floor.

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The ultralong bond is back in consideration as deficits rise

Photo: Chen Mengtong/China News Service/VCG/Getty Images

The Treasury Department announced Wednesday that it was looking into releasing two new maturities — a 50-year and 20-year bond.

Why it matters: The new issues would help offset the increasing share of Treasuries that U.S. financial institutions have had to buy recently, largely as a result of decreasing foreign buyers and the Trump administration's increasing deficits.

Go deeperArrowOct 31, 2019

Services data is following manufacturing

Data: Institute for Supply Management; Chart: Axios Visuals

Bullish market analysts and money managers have been somewhat dismissive of deteriorating manufacturing data this year and its importance, arguing that the sector makes up a minute portion of the U.S. economy.

Why it matters: While that is true, manufacturing is a leading indicator, and more bearish investors have insisted the sector's decline would drag the rest of the economy down with it.

Go deeperArrowOct 4, 2019

The Treasury yield curve has steepened for all the wrong reasons

Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

The U.S. Treasury yield curve is steepening, which typically means investors are growing more confident about the economy. However, analysts say recent moves are actually the result of more fear being priced into the market.

Why it matters: Rather than bets U.S. growth or inflation will pick up, as is the case when the curve sees "bull steepening," action in the Treasury market reflects worry that things could get especially bad in the short term, Tom Essaye, president of Sevens Report Research, tells Axios.

Go deeperArrowOct 4, 2019