Here's Why the Stock and Bond Markets Are Telling Two Different Stories

While the Dow and S&P 500 hit new record highs on Tuesday, yields on the 10-year Treasury are trading near record lows.
By Scott Gamm ,

The stock and bond markets are telling two very different stories.

The Dow Jones Industrial Average and the S&P 500 hit new record highs on Tuesday. Still, yields on the 10-year Treasury, at 1.5%, are trading near their record lows reached last week, when yields dipped below 1.4%.

Lower yields typically indicate concerns about the economic outlook, as fixed income is usually viewed as a safe haven asset. Bonds and yields move in opposite directions.

"The Brexit issue has really knocked the Federal Reserve out of the picture in the near-term," said Dean Maki, chief economist at Point72 Asset Management, referring to the UK's vote on June 23 to leave the European Union.

"Fed rate hikes are not a near-term event, certainly not this month, yet the economic data in the U.S. is getting better, so you can't ask for more in the equity market -- a Fed on hold, economic data improving and that's why we're seeing this combination."

He said yields are low because the Fed is expected to delay its second rate hike and a 1.5% 10-year Treasury yield is still more attractive than European or Japanese sovereign debt which stands near zero or in negative territory.

The stock market rally this week was partly attributed to last Friday's better-than-expected jobs report. The economy gained 287,000 jobs in June, beating estimates of 180,000 positions, a stark turnaround for a labor market that only added 11,000 jobs in May.

The Dow has rallied some 385 points since the release of the June employment report.

"The message of the June report was that the job market has slowed a bit, but it's still growing at a moderate pace," Maki said.

Maki thinks a September rate hike is possible, but said Fed officials would need to start prepping the markets for such an event through speeches and commentary. He expects the Fed to raise rates at some point in 2016.

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