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Illustration: Megan Robinson/Axios

Treasury yields have been falling, and yet stock prices remain near record highs. On the surface, this seems like conflicting attitudes toward risk. But a closer look at these markets reveals a much more consistent narrative.

Why it matters: Since March, long-term Treasury yields have been sliding, with the 10-year yield falling from 1.74% in late March to as low as 1.13% on Monday.

  • Most market watchers agree this reflects an aversion to risk.

Driving the news: The spread of COVID variants has been troubling. And among other things, it risks disrupting economic growth.

  • "I think we were pricing in the world going back to normal," Roberta Goss, co-head of the bank loan and CLO platform at Pretium, tells Axios. "But it's not 'normal.' It's not going to be normal for quite some time, and the path to normal is not linear."

Between the lines: While the major stock indexes are near record highs, the relative performance of certain categories of stocks reflects a shift toward more cautious positioning.

Flashback: In what's been dubbed the "reflation trade," traders bullish on the reopening of the economy had been showing a preference for stocks that are more sensitive to shorter-term bouts of growth — or cyclical growth.

  • In this environment, small-cap stocks are preferred over large-cap stocks. Meanwhile, Big Tech stocks, which are defined by longer-term — or secular — growth fell out of favor.

What they’re saying: Capital Economics analyst Jonas Goltermann observed that for most of the second half of 2020 as Treasury yields were rising, the Russell 2000 index of U.S. small-cap stocks outperformed the large tech-heavy Nasdaq.

  • This continued into spring 2021 until yields peaked and then turned lower — and the Russell 2000 started to lag the Nasdaq, a trend that’s lingered to this day.

The big picture: The major stock market indexes like the Dow and S&P 500 offer a limited view of what’s going on in the economy. Underlying these indexes are dozens of industries and thousands of companies that all have unique stories to tell.

The bottom line: Both the bond market and stock market reflect more cautious behavior by investors and traders.

Go deeper

Kate Marino, author of Markets
Oct 21, 2021 - Economy & Business

A milestone in ditching Libor

Illustration: Sarah Grillo/Axios

The bank loan market is in the process of scrapping Libor, the benchmark rate that it’s used seemingly forever. That process was moving along pretty slowly — until now.

What’s new: JPMorgan made the first move in the corporate term loan market, on Friday selling a loan for Walker & Dunlop with an interest rate that’s not pegged to the disgraced Libor.

Defense taking steps to mitigate civilian harm after botched airstrikes

Secretary of Defense Lloyd Austin speaks during a news conference at the Pentagon in Arlington, Virginia on Sept. 1, 2021. Photo: Andrew Harrer/Bloomberg via Getty Images

Defense Secretary Lloyd Austin issued a directive Thursday to improve the U.S. military's approach to civilian harm mitigation and response, calling it a "strategic and a moral imperative."

Why it matters: The Pentagon has faced criticism for years for amassing civilian casualties in its missions, especially in the Middle East. New York Times investigations have found systemic failures in efforts to prevent civilian deaths, as well as a cover-up of a 2019 airstrike that killed dozens of women and children in Syria.

2 hours ago - World

Mapped: The world's most and least corrupt countries

Expand chart
Data: Transparency International; Map: Jared Whalen/Axios

The most corrupt governments in the world are in South Sudan, Syria and Somalia, according to Transparency International's annual index, while the "cleanest" are in Denmark, Finland and New Zealand.

  • Breaking it down: The U.S. is 27th, China 66th, India 85th, Brazil 96th and Russia 136th. Scroll over the map to see each country's ranking.