Is the US Bond Market Trying to Send a Signal?

The only trend I can find right now out in the markets is a lot of uncertainty. On the one hand the stock market is near all time highs and is back up off its recent pullback some. We get some economic reports that seem to indicate the economy is doing better. But then we get other reports calling that into question. And the yields on long term bonds are are incredibly low levels. Are those bonds trying to signal anything?

Here is a CNBC article that touches on this topic. Notice how while hope abounds that the high stock market is indicating an improving economy, this article takes a different view of that. Below are some quotes and then a concluding comment.

"Producer price inflation data and industrial production are among the reports expected Friday, as traders attempt to decipher whether the bond market or the stock market is sending the right signal."

"Stocks were on track after Thursday's gains for the best weekly performance since July 3. The bond market, meanwhile, plumbed yields at the bottom of the recent range after a $16 billion 30-year bond auction drew strong demand at low yields last seen at auction more than a year ago."

"Gina Martin Adams, institutional equity strategist at Wells Fargo Securities, said the stock market's move higher has to do with the Fed. The market, in recent sessions, has spun bad economic reports in a positive way on the logic that a weaker economy could mean the Fed would be slower to remove stimulus or raise rates. Weekly jobless claims were slightly disappointing Thursday, rising back above 300,000."

"I think that the market is saying awful news is OK because it gives us our juice for longer. We kind of hoped we'd start to trade on earnings trends," Adams said. "But earnings don't matter. In earnings season, stocks fell and it was the best earnings season we've seen in years."

Trader focus has already been shifting to next week, when minutes from the Fed's last meeting are released Wednesday. But the highlight comes when Fed officials head to Jackson Hole, Wyoming, for their annual symposium at the end of the week.

Ward McCarthy, chief financial economist at Jefferies, said it's unlikely there will be much to surprise markets from Jackson Hole. "Basically Jackson Hole is going to be a showdown between those who think the labor market still has wounds and those who think it's coming along," he said.

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my added comment: If you read this CNBC article you come away with no idea if the economy is getting better or worse. Keep in mind Jim Rickards is saying it is getting worse and will keep on doing so into 2015. The Fed has been saying they see an improving economy ahead so they can begin to talk about when to raise interest rates. We will be following that to see who ends up being right.

But then look at the long bond markets. Money pouring in to these long term very low yields. Most interpret that as a signal the the economy is getting worse and not better. A flight to safety for some reason?

One thing I think I have learned over time. When markets are moved more by what the Fed is going to say next rather than the true fundamentals of what is happening in the economy, something is not right. That is what this CNBC article says. It's all about what the Fed is going to say or do next. Stocks go up because bad economic news means the Fed can continue their easy money policies. Does that sound like a solid improving economy?

This situation is unsustainable. At some point the economy has to prove it can stand on its own legs without being propped up by Fed easy money policies. Until we see that happen, uncertainty is likely to continue. And volatility may be very high.