More likely those yield falls are just
US political adviser James Carville is reputed to have said: “I used to think that, if there was reincarnation, I wanted to come back as the US president or the pope or a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.” Government bond markets in the US and Europe have been pretty intimidating lately, with sharp falls in yields suggestive of imminent global economic recession and disinflation. Is the bond market right? Is the global economy falling apart? Is inflation dead? Or has the bond market embarked on a flight of fancy, chasing butterflies into the long grass?
At Economic Perspectives our research indicates that credit markets, rather than bond markets, do the best
job of warning what lies around the corner. As long as the real growth rate of global private and public sector debt is expanding and US corporate credit spreads
are not widening, then the strong likelihood is that the global economy will be growing too. If weighted-average government yield curves are becoming steeper, then more’s the good. If they are flattening or inverting, then this will detract from the real outlook.
Our latest assessment of the credit data shows a stable growth rate of private and public debt, in real terms, of around 3% a year: in advanced economies it’s nearer to 2%, and in emerging economies it’s about 7%. US credit quality spreads spiked in the final quarter of 2018 and have not fully retraced but remain very tight from a longer-term perspective. Government bond yields have inverted in the US and Australia, flattened in Japan, the Eurozone, Russia and Brazil, but steepened in China and India. Overall, this gives a pretty neutral outlook for the global economy, with a bias towards deceleration but not recession.
Does the bond market have a better understanding of the unfolding dynamics of the global economy? One that is distinctly more downbeat and scarily imminent? Or is this all about the market’s confident anticipation that policy-makers will cave in, taking interest rates back to the lower bound and restarting quantitative easing programmes?