U.S. government debt yields extended their slide on Wednesday, as China trade tensions and fears of an overvalued stock market drove investors into the relative safety of bonds.
The move into government bonds continued Wednesday, as Treasury yields touched fresh multi-week lows. The yield on the benchmark 10-year Treasury note fell to 1.73%, its lowest since Nov. 2. Yields fall as bond prices rise.
The long end of the yield curve also fell, with the 30-year Treasury note hitting a low of 2.19%. That’s a decline of roughly 6 basis points from Tuesday’s close.
Bond markets are becoming more sensitive to trade-war speculation as investors continue to hedge against political uncertainty.
Progress towards a ‘phase one’ trade deal between the U.S. and China hit a stumbling block Tuesday after President Trump threatened Beijing with more tariffs. The developments prompted investors to move capital into safe-haven assets, with government bonds and gold benefiting.
An analyst at JPMorgan Chase has warned that the U.S. stock market is “overbought” following the record-setting gains of the past few weeks. Ironically, he’s not advising investors to sell just yet. Quite the contrary: The investment bank is still bullish on the S&P 500.
Jason Hunter, the firm’s head of global fixed income and U.S. equity technical strategy, told CNBC on Tuesday that,
We have a bullish view on the S&P going into the early part of next year at least … You’re going to see further rotation away from defensives.
Regarding the “overbought” nature of the market, Hunter said,
You do have overbought momentum right now after a prolonged period of sideways price action … Typically, what you tend to see is momentum will peak before the price trend actually does.
Apparently, investors are “panic buying” to capitalize on the bullish revival. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite Index have each set multiple record highs this month.
But the disconnect between fundamentals and performance is likely to face sustainability issues moving forward. With the U.S. economy bracing for its worst quarter under President Trump and no substantial progress made on a free trade deal, investors will have a harder time justifying the record valuations in stocks.
Although the JPMorgan analyst said there’s no urgency in preparing for a stock market correction, a growing number of investors are already shifting course. The bond markets have been flashing a warning sign since the summer when an inverted yield curve forced investors to question the health of the U.S. economy. Although the yield curve has corrected, it’s behaving exactly as it would before a major downturn. That’s because a sudden steepening of the curve following an inversion almost always happen before or during recessionary cycles.