Goldman Sachs and other investment firms warned that the market was getting more and more at risk of a 10% stock market correction, with the caveat that stocks would resume the bull market thereafter. Now we have the bond market signaling that things might be far worse than just a 10% correction.

At this time, the Federal Reserve is tapering its bond buying down – twice now, to $65 billion per month now. That means one less large natural buyer in the market. So why are interest rates dropping?

What is being signaled to the market is that the current economic report weakness is not just a polar vortex making weather related weakness. China is slowing and emerging markets are suffering from currency shocks. The ISM, the last jobs report, durable goods, and other reports are all signaling slower growth at a time when economists were looking for larger gains.

Are bonds signaling a crash? Probably not. The problem is that they are not signaling all is just an orderly sell-off here to adjust valuations. Many investors feel that the bond market is a better 9or smarter) barometer of reading the economy than the stock market. That is up to you to decide, but here are some bond market statistics:

• The 10-year Treasury yield is now back down to 2.58%, when it was at 3% as recently as January 9 after peaking at 3.04% in the final hours of 2013.
• The 30-year Treasury was down to 3.53% on Monday. This was up at 3.91% on January 9 and hit 3.97% at recently as the first day of 2014.

If you want to know just how bad things are, the iShares 20+ Year Treasury Bond (NYSEArca: TLT) gained 1.22% to $109.32 on Monday. What really stands out here is that the exchange-traded product traded over 20.5 million shares, which is nearly three-times the normal trading volume.

Everyone was predicting that bond yields would continue to rise in 2014. They were predicting that even before Ben Bernanke and Janet Yellen made the commitment to taper the bond buying. If rates are sinking even when the Fed is less of a buyer, it means that a lot of institutions are getting worried about more than just an orderly stock market sell-off.

Maybe the technical breakdown in the stock market is a part of the fear. Maybe it is everything else outside of the control of the United States. Then there is the theory that the markets want to test each new Federal Reserve chairman to see what they are made of. in that case, welcome aboard, Janet!

 

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