Just two months ago, the economy was on the brink…
The “Liberation Day” tariff announcement was brand-new. Markets were crashing. And economic warning signs were popping up everywhere you looked.
One of the most worrisome warnings came from the bond market. Interest-rate spreads were exploding. And as I explained on April 24, that was a terrible sign… if it kept going.
This dangerous trend has reversed, though. The bond market’s warnings are all but gone. And that means you don’t need to stress about the rebound that’s underway.
Let me explain…
In times of market stress, there’s one place you can look for direction: the bond market.
Stock investors panic at any sign of trouble. But bond investors only worry when the storm clouds are worth paying attention to.
Folks were right to be scared in early April. The bond market showed that a horrible economic situation could unfold in front of our eyes. But now, that has changed…
Interest-Rate Spreads Are Back to Normal
The big indicator at the time was the interest-rate spread between risky high-yield bonds and risk-free U.S. Treasury bonds. When this spread spikes, it means bond investors are worried about defaults on risky bonds. And that only happens when a recession is imminent.
Thankfully, the clouds have lifted. This interest-rate indicator – known as the high-yield bond spread – is now back to a more normal level. Take a look…
The high-yield spread soared from 2.6 percentage points to 4.6 percentage points in a matter of weeks. The bond market was in a crisis of confidence.
The real danger was that spreads might keep soaring… But they didn’t. Instead, as the chart shows, they’re now back below pre-Liberation Day levels.
That’s because folks are buying bonds again. The chart below shows mutual fund and exchange-traded fund (“ETF”) flows into bond funds by month. These flows went hugely negative in April as investors panicked… Then, they rebounded in May. Take a look…
Investors have bought bonds like crazy in recent years. But that ended during the April panic, when we saw about $52 billion in outflows.
That was the fifth-worst month for bond flows since the data began in 2013. But we saw a sharp rebound in May, with an inflow of $58 billion.
The data tells a clear story… The tariff shock spooked bond investors and threatened the economy. But those investors aren’t worried now. The “smart money” is back to buying.
Of course, that doesn’t mean new problems won’t arise in the future. But the red light we were getting from the bond market is gone.
That means we don’t have to worry if the stock market rebound is a false move higher. Instead, we can trust the rally – and get bullish.
Good investing,
Brett Eversole
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Source: Daily Wealth
