U.S. government bond yields extended their September rally on Wednesday, climbing to fresh monthly highs on better than expected data and Chinese trade optimism.
Although bonds seem to be recovering, one analyst provided a sobering take on why investors should avoid buying them as a hedge against recession.
Government bond yields were higher across the board, with the benchmark 10-year U.S. Treasury peaking at 1.75%, the highest in over a month. Yields rise as bond prices fall.
The 2-year Treasury note yielded as much as 1.69% on Wednesday, according to CNBC data. The 30-day bond yield climbed to 2.23%.
The yield curve was aided by stronger than expected inflation data on Wednesday. The producer price index (PPI), a gauge of factory-fate prices and corporate profitability, rose 1.8% annually. Core PPI, which strips away food and energy costs, climbed 2.3% annually, official data showed.
Just because Treasury bonds are recovering, investors shouldn’t be duped into buying them, according to DoubleLine Capital’s Jeffrey Sherman.
In an interview with CNBC last week, Sherman said the bond market’s tendency to “overshoot in both directions” is not unique.
“We’re not convinced that if we have a recession today the bond market rallies significantly from here,” he said. “That’s always the assumption, but we have rallied a lot and there is a lot of negative news priced into the rates market.”
The flight to U.S. Treasurys intensified in August, pushing the yield curve to multi-year lows and threatening even steeper declines. In the process, several worrisome inversions had materialized or intensified, including between the 10-year/2-year and 10-year/3-month. The latter predicts recession 100% of the time.
Would-be investors looking to safeguard against economic turmoil will have better fortunes buying gold, Sherman offered. In his view, the U.S. dollar is certainly heading lower by year’s end. This makes dollar-denominated gold cheaper to buy for foreign investors.
“Gold has zero yield, it has volatility, it’s not stable. But if you think that we’re going negative and it’s going to cause a problem with the financial system, I think that little shiny rock may be something that does perform very well.”