There’s been no shortage of discussion about the extent to which bonds are saying something completely different about the outlook than stocks.
Indeed, the following chart (or some variation of it) has become ubiquitous of late:
And while a lower dollar and falling yields have helped fuel carry trades, BofAML is out on Tuesday warning that if the US rates market is indeed correct, virtually everything else is mispriced – including, and especially, stocks..
The rates market is pricing in a considerable chance of the US economy rolling over. The fact that UST 10y rates have traded in a very tight range for the last two months has been interpreted as a reassuring signal for carry trades everywhere. In fact it should be a warning signal. Rates are where they are, not because the world economy is in a sweet spot with growth neither too hot nor too cold, but because the market is caught between having to reprice rates lower (a high implied risk of rate cuts for next year) or higher (price out end-of-cycle risks, price in an active Fed and a deteriorating supply-demand gap for fixed income). If the US rates market is right, then the rest of the FICC space, let alone equity markets, are mispriced.