Treasuries continue to rally, pushing yields lower and sparking concerns in other markets as to what bond investors are signaling.  Most major equity indices are down more than 1% on the day (Nikkei -1.2%, Euro Stoxx -1.7%), and S&P 500 futures are down -0.7% ahead of the U.S. market open. The primary headline overnight affecting markets was China’s threat to use rare earth minerals as a weapon in the current trade/tech war. China commands much of the market for these minerals used for products ranging from iPhones to missiles because they have been more willing than others to refine those minerals from ore, which can be expensive and polluting. This threat is not new. China has been considering this threat for some time, and as a New York Times article pointed out last week, using these minerals as a trade weapon is likely more bark than bite. Nevertheless, the negative sentiment in the global markets grows deeper, and the bond market continues to price for a greater probability of a Fed rate cut. However, the official stance from the Fed in recent weeks has been a desire to allow the transitory factors weighing on inflation to abate.

Fixed income investors obviously aren’t as optimistic, and breakeven yields in the TIPS market, which are a popular measure of market inflation expectations have fallen 20-25 bps this month. While U.S. economic data have been more mixed in recent weeks/months, it has not been bad enough to fuel such a bearish tone in the markets. However, markets are creatures of momentum, and as the old saying goes, don’t catch a falling knife.

Jason Haley
Managing Director, Investment Management Group