Markets are easier to understand when two of the world’s most liquid asset marketplaces are telling the same story about the economy.
This isn’t one of those times.
On the one hand, there’s the bond market, where the 2-year
BX:TMUBMUSD02Y
yield briefly was above the 10-year
BX:TMUBMUSD10Y
yield, and where other parts of the curve have been inverted for some time. Cue the watch-out-for-recession talk.
And then there’s the stock market, where the S&P 500
SPX
has exited correction territory with a 12% advance from its March 9 lows. Also, the VIX
VIX
volatility index has dropped below the average 19.67 level for 2021, hardly an alarming level for what’s 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.
“The ‘recession is coming’ 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,” says Bassman, who created the MOVE index measuring interest rate volatility during a storied career at Merrill Lynch.
“But since stocks are priced in ‘nominal’ terms, not ‘real’ terms, they can still increase in such an environment.” So while Bassman says there very well could be a recession in real GDP terms, nominal GDP may exceed 5%. He adds the 10-year should have “no problem” 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…
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You can read this complete story at: https://www.marketwatch.com/story/stocks-are-rallying-the-bond-market-is-flashing-a-recession-warning-how-one-expert-explains-the-conundrum-11648637536
