Stock markets and economists are busily shrugging off an unexpectedly harsh revision to U.S. economic growth figures for the first quarter. But the general don't-worry-be-happy vibe has so far left out one notable observer: the bond market.
The story told by bonds – especially government bonds in the developed world – is rather downcast. The yield on the Bloomberg Global Developed Sovereign Bond Index hit its lowest point in a year on Wednesday. That suggests investors are coming around to the notion that interest rates will remain lower for longer than they thought a few months back, and so are increasingly willing to load up on bonds, even at their current miserly yields.
Low bond yields are mixed news for stocks and the economy. On the one hand, they imply that companies will continue to be able to borrow at very low rates of interest, which is good for businesses' bottom lines, everything else being equal. However, they also suggest that the real economy will continue to plod along at its current uninspiring pace. Few people would be willing to invest money at 2.2 per cent a year (the current yield on a 10-year Government of Canada bond) if they believed that GDP will be bustling ahead by 3 or 4 per cent a year over the decade ahead. So current bond yields imply that investors don't expect annual economic growth to be much above 2 per cent during the next 10 years.
An economy crawling along at that turtle-like pace is also an economy that can easily be tipped into a downturn. The revision announced on Thursday, which showed the U.S. economy shrinking at a 1-per-cent annual rate, has been widely blamed on an unusually harsh winter. But an equally valid way to view the setback is to note that a slow-growth economy is a fragile one, where it doesn't take much bad news to create a negative figure.
Despite the unwelcome revision, economists pointed to a host of figures, ranging from durable goods orders to unemployment claims, that suggest the economy is rapidly picking up steam. The bond market, however, is clearly not convinced about the long-term outlook and its opinion is usually the one to watch.