“An involuntary return to the point of departure is, without doubt, the most disturbing of all journeys.” – Iain Sinclair

What is going on in the bond market is not just some “trend.”  Interest rates are the heart, soul, and life of the free enterprise system.  And that heart is beating in an erratic way.

Charlie Bilello, our Director of Research, sums it up nicely:

The German 10-year is on the verge of going negative in what is now a disturbing global move, and one that cannot be explained only by central bank action.  If the cost of capital has no cost, the entire financial system fails because everything is built on the risk-free rate.

Last week, the movement in bonds became more troubling than in the recent past.  While the “stealth bull market” I referenced looked set to persist on emerging market and small-cap strength, the problem now is that the global yield crash is warning of something severely wrong.  That crash accelerated last week.  Oil’s move should have resulted in bond yields cracking to price in rising cost-push inflation from the global commodity rally.  Instead, that commodity move seemingly has had no impact.

Here in the US, the yield curve has pushed to new expansion lows.  This despite the Fed “raising” rates when in fact all rates, including long duration US rates, have fallen aggressively since.

Why is this happening?  We will only know with hindsight, but perhaps the whole “Brexit” thing is legitimately scaring the marketplace.  I don’t believe this is the sole reason though.  We are either in the final stages of a bubble in bonds, or we are in the final stages of a bubble in stocks if bonds are right.

Strange world we live in.  Very near-term this significantly muddies up volatility visibility.  With long duration Treasuries outperforming intermediate (an important indicator as referenced in our award winning paper), conditions near-term may get ugly and abruptly reverse everything that has happened since the February lows.

False positive?  Type 1 error?  Maybe – but history suggests that when bonds act this way, it is worth paying attention to and being concerned about.