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Conflicting Signals from Fixed Income Markets

“Fixed income markets appear to be facing a similar conundrum as the ClearBridge Recession Risk Dashboard. On one hand, the relentless drop in Treasury yields can be interpreted as a signal of economic weakness. On the other, credit performance remains strong and the calm in credit spreads can be viewed as a positive sign.


Many market observers argue cross-over buyers from overseas are pushing down U.S. yields given negative rates in their home markets, and thus low yields can be ignored as less reflective of domestic weakness than in the past. However, currency hedging costs are substantial for overseas investors and only by going to very long-dated Treasury bonds and spread products can an overseas investor earn a positive return. As a result, the influence of negative rates across the globe on U.S. Treasury yields may be less than some believe. 


Rather, falling PMIs, which are good proxies for the business cycle and have moved in near lockstep with 10-year Treasury yields since the financial crisis, suggest the slowing business cycle (softer domestic backdrop) is the more likely culprit for low U.S. rates. This has important implications for equity investors, as many have dismissed the yield curve’s inversion as a side effect of overseas bond market trends, perhaps unwisely."


(The Long View: Can the Consumer Endure Mounting Headwinds? dated 09/30/2019 by Jeffrey Schulze CFA, Director & Investment Strategist, with ClearBridge Investments, LLC)


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