Treasury bonds and related exchange traded funds are strengthening as investors turn to the relative safety of government debt in face of growing recession fears.
On Tuesday, the Vanguard Extended Duration Treasury ETF (EDV) rose 1.8%, the SPDR Portfolio Long Term Treasury ETF (SPTL) increased 1.3%, the PIMCO 25+ Year Zero Coupon US Treasury Index ETF (ZROZ) was up 2.6%, and iShares 20+ Year Treasury Bond ETF (TLT) gained 1.5%.
“This is a recession trade,” Neil Dutta, the head of economics at Renaissance Macro Research, told Bloomberg. “There is no other way of describing it.”
Some market observers have pointed out that the bond markets are also flashing recession warnings with the Treasury yield inverting where yields on longer-dated Treasury notes are trading below those of shorter-term notes. For instance, at mid-Tuesday, the two-year Treasury yield was at 2.792%, or above the 2.789% rate of the 10-year note, CNBC reports.
“There’s something afoot in investor sentiment that is difficult to ignore, given the inversion is occurring with 10-year yields below 3%,” Ian Lyngen, head of U.S. rates strategy at BMO, told CNBC. “I wouldn’t say it’s a direct indication that a recession is a near-term risk. Rather it’s consistent with increased concern about recession.”
While we are not in a recession now, Dutta warned that the markets are already pricing in the potential for an economic recession.
“We’re not in one right now, but the markets are a discounting mechanism and I think the markets see the economy potentially going into one or getting closer to being one,” Dutta added. “We’ve gone some way into pricing in a recession in the markets, but I don’t think we’re all the way there.”
Dutta warned that the outcome will likely depend on the Federal Reserve, or how aggressively the Fed will act to combat inflationary pressures and an overheating economy.
“I don’t think one is inevitable but I think that a lot of it is dependent on what the Fed does,” Dutta said. “If the data suggests that the Fed should pivot from its current policy approach and they don’t, then we have a problem. To me that that’s the issue.”
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