{"id":3255,"date":"2022-03-31T02:53:34","date_gmt":"2022-03-31T02:53:34","guid":{"rendered":"https:\/\/linksus.net\/stocks-are-rallying-the-bond-market-is-flashing-a-recession-warning-how-one-expert-explains-the-conundrum-marketwatch\/"},"modified":"2022-03-31T02:53:34","modified_gmt":"2022-03-31T02:53:34","slug":"stocks-are-rallying-the-bond-market-is-flashing-a-recession-warning-how-one-expert-explains-the-conundrum-marketwatch","status":"publish","type":"post","link":"https:\/\/linksus2.linksus.net\/index.php\/2022\/03\/31\/stocks-are-rallying-the-bond-market-is-flashing-a-recession-warning-how-one-expert-explains-the-conundrum-marketwatch\/","title":{"rendered":"Stocks are rallying. The bond market is flashing a recession warning. How one expert explains the conundrum. – MarketWatch"},"content":{"rendered":"

Markets are easier to understand when two of the world\u2019s most liquid asset marketplaces are telling the same story about the economy.\u00a0
This isn\u2019t one of those times.
On the one hand, there\u2019s the bond market, where the 2-year TMUBMUSD02Y, 2.294%<\/bg-quote><\/a> yield briefly was above<\/a> the 10-year TMUBMUSD10Y, 2.336%<\/bg-quote><\/a> yield, and where other parts of the curve have been inverted for some time. Cue the watch-out-for-recession talk.
And then there\u2019s the stock market, where the S&P 500 SPX, -0.63%<\/bg-quote><\/a> has exited correction territory with a 12% advance from its March 9 lows.<\/a> Also, the VIX <\/a> VIX, +2.28%<\/bg-quote><\/a> volatility index has dropped below the average 19.67 level for 2021, hardly an alarming level for what\u2019s called the fear gauge.
Harley Bassman, managing partner at Simplify Asset Management and the self-described Convexity Maven, tries his best to explain the conundrum.\u00a0\u00a0
\u201cThe \u2018recession is coming\u2019 pundits argue that CPI inflation exceeding wage inflation will dampen consumer demand and rapidly reduce real GDP. This seems to be what the yield curve is contemplating,\u201d says Bassman, who created the MOVE index measuring interest rate volatility during a storied career at Merrill Lynch.
\u201cBut since stocks are priced in \u2018nominal\u2019 terms, not \u2018real\u2019 terms, they can still increase in such an environment.\u201d So while Bassman says there very well could be a recession in real GDP terms, nominal GDP may exceed 5%.\u00a0He adds the 10-year should have \u201cno problem\u201d kissing the 3.25% high reached in October 2018 if former Treasury Secretary Larry Summers is right that the Federal Reserve has stumbled into stagflation.
Since last May he has been recommending a strategy consisting of buying, for every $25 on a five-year Treasury, a put option on $800 worth of securities that expires in seven years on the 20-year.
The one market Bassman says is acting rationally is that for mortgage-backed securities, where the spreads between MBS and Treasurys are widening above their average. He says MBS are a better buy than a sell, which is why mortgage REITs have bounced off their recent lows.\u00a0
\u201cThe greatest risk for these leveraged investments is their funding cost, which is linked to the fed-funds rate. Presently, the market is pricing a peak fed rate of 2.75% to be reached in June 2023, essentially when the yield curve projected recession should start. To the extent this is true, you can dip your toe; but if the Fed has a lot more to do, these investments will be reducing their payouts,\u201d says Bassman.
Ukrainian President Volodymyr Zelensky said there was no reason to believe that Russia will reduce military activity near Kyiv after the negotiations held on Tuesday. Poland says it will end all Russian oil imports by the end of the year, as Germany issued a warning about natural-gas supplies from Russia.
ADP reported a 455,000 rise in private-sector payrolls for March. The third estimate of fourth-quarter GDP was fractionally revised lower, and speeches from two regional Fed presidents are on deck.
Athletics apparel maker Lululemon Athletica LULU, +9.58%<\/bg-quote><\/a> reported a stronger-than-forecast fourth-quarter profit and guided for current-year profit and sales ahead of estimates.
Memory-chip maker Micron MU, -3.52%<\/bg-quote><\/a> topped Wall Street expectations due to continued growth in data-center sales.
Furniture retailer RH RH, -13.33%<\/bg-quote><\/a> announced a 3-for-1 stock split but warned that it is experienced softening demand after Russia\u2019s invasion of Ukraine.
Camden Property Trust CPT, -0.46%<\/bg-quote><\/a> will replace People\u2019s United Financial, which is being acquired, in the S&P 500.
U.S. stock futures ES00, +0.32%<\/bg-quote><\/a> NQ00, +0.58%<\/bg-quote><\/a> were pointing to a softer start. Oil CL.1, -5.18%<\/bg-quote><\/a> futures rose, as did gold GC00, -0.41%<\/bg-quote><\/a>.<\/span>
Here were the most active stock-market tickers as of 6 a.m. Eastern
The president of BlackRock BLK, +0.53%<\/bg-quote><\/a> says the entitled generation is learning about shortages.<\/a>
Basketball legend Kareem Abdul-Jabbar shares his thoughts about Will Smith\u2019s slapping of Chris Rock<\/a> at the Oscars.
Need to Know starts early and is updated until the opening bell, but sign up here<\/a> to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern. <\/strong>
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Megacap stock splits mean the Dow Jones Industrial Average has a chance to pick up a growth stock. But will it?
Steven Goldstein is based in London and responsible for MarketWatch’s coverage of financial markets in Europe, with a particular focus on global macro and commodities. Previously, he was Washington bureau chief, directing MarketWatch’s economic, political and regulatory coverage. Follow Steve on Twitter: @MKTWgoldstein.<\/p>\n

source<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Markets are easier to understand when two of the world\u2019s most liquid asset marketplaces are telling the same story about the economy.\u00a0This isn\u2019t one of those times.On the one hand, there\u2019s the bond market, where the 2-year TMUBMUSD02Y, 2.294% yield briefly was above the 10-year TMUBMUSD10Y, 2.336% yield, and where other parts of the curve […]<\/p>\n","protected":false},"author":869,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"_links":{"self":[{"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/posts\/3255"}],"collection":[{"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/users\/869"}],"replies":[{"embeddable":true,"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/comments?post=3255"}],"version-history":[{"count":0,"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/posts\/3255\/revisions"}],"wp:attachment":[{"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/media?parent=3255"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/categories?post=3255"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/linksus2.linksus.net\/index.php\/wp-json\/wp\/v2\/tags?post=3255"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}