The yield on the U.S. 10-year Treasury note has
been on a post-holiday weight loss plan. It was around 2.25% the day after Christmas.
It touched a low of 1.89% on Tuesday. Stocks and bonds move around all the
time, but the 2% yield is a red-flag threshold. It means that investors are
basically willing to accept an interest rate on a bond that will lose them
money in the long-term, since U.S. inflation typically hovers around 2%.
That's how worried investors are. Markets hate
uncertainty. With crude oil now trading solidly below $50, experts predict it
could go as low as the $30-range. But the story goes beyond oil. Global
investors are even more edge as Europe teeters on the verge of recession,
China slows, and Russia and Japan are actually contracting.
One of the great surprises of 2014 was how well U.S.
government bonds performed. As the U.S. Federal Reserve ended its bond-buying
stimulus program last year and hinted at raising interest rates in 2015, the
expectation was that yields would rise and bond prices would fall. The opposite
happened because so many foreign buyers continued to prefer the safety of
American bonds, even if the yield wasn't great.
There's so much concern in Europe right now that the yield
on German 1-year to 5-year bonds and French 1-year to 3-year bonds is actually negative.
That means that investors are basically paying to hold those bonds.
In another sign of just how much panic is out there, the
yield on the German 30-year bond fell below Japan's 30-year bond yield on
Tuesday. That's an extremely rare occurrence since the Japanese economy has
basically been in stagnation for two decades with notoriously low bond yields.
The question for investors is whether to follow the masses
into bonds or stick with stocks. As CNNMoney's Paul La Monica points out,
the U.S. market is overdue for a correction -- a 10% drop or more. But Michael
Block of Rhino Trading Partners called this market dip a gift.
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