Bonds Scream Recession

What was largely ignored, however, was a higher-than-expected reading of the Fed's favorite measure of inflation -- the core personal-consumption expenditures deflator, which rose 0.2% in October against expectations of a 0.1% jump. This brings the inflation measure to 2.36% year over year, still near the upper end of the Fed's target range.

With Bernanke's hawkish comments Tuesday that inflation remains "uncomfortably high" ringing in some investors ears, the fed funds futures market put only 14% odds of a cut in January, up from 10% on Wednesday, notes Tony Crescenzi, chief fixed-income strategist at Miller Tabak and contributor to RealMoney.com. For the March meeting, the market upped odds of a cut to 50% from 46% and brought the chances of a cut in May to 100% up from 96% Wednesday.

But Bernanke's inflation warnings aside, evidence of poor growth fuels recession fears in the growth-obsessed bond market. The irony is that bond investors' pessimistic outlook brings down interest rates, which spurs investors' hopes for the housing market.

Thanks to the bond bulls, low yields limit the damage to consumers with adjustable-rate mortgages and fuel more home buying and refinancing. The average 30-year mortgage rate fell recently to 6.14% for the week ended Thursday, a level not seen since January of this year, according to data released by Freddie Mac.