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Turmoil in stocks has been grabbing headlines. But warning signs are also flashing in global bond markets, revealing the extent to which investors are on edge about the economy, inflation and what central bankers will do next.
What’s happening: The yield on benchmark 10-year US Treasuries — which moves opposite prices — jumped to 3.36% on Monday, its highest level since 2011.
But the yield on the 2-year Treasury climbed even higher as investors dumped those notes, too. That created an unusual phenomenon known as a “yield curve inversion.”
Breaking it down: Usually, the yield on longer-dated bonds is higher than that on shorter-dated bonds. It’s harder to predict what will happen further into the future, and investors want to be compensated for that extra risk.
However, after the surprise jump in US inflation in May, when prices rose at the fastest rate in 40 years, traders are bracing for dramatic action from the Federal Reserve later this week. That could spell trouble for the economy near-term.
Former Fed Chair Ben Bernanke told CNN’s Fareed Zakaria on Sunday that he thinks Jerome Powell, the current Fed chief, can still bring down inflation without causing a recession.
“Economists are very bad at predicting recessions, but I think the Fed has a decent chance — a reasonable chance — of achieving what Powell calls a ‘soft-ish landing,’ either no recession or a very mild recession to bring inflation down,” Bernanke said.
Bond traders, for their part, seem more skeptical. A yield curve inversion has preceded every single recession since 1955, according to research by the Federal Reserve Bank of San Francisco.
Over in Europe, the bond market is also showing signs of anxiety.
The gap between yields on 10-year German and Italian government bonds was at its widest since March 2020 on Monday, according to Tradeweb. It was the same for 10-year German and Greek bonds before a market holiday in Greece on Monday.
That indicates concern that the European Central Bank — which announced last week that it will raise interest rates in July for the first time in 11 years — could strain EU countries with high debt loads as it hikes borrowing costs. The more they have to pay servicing debt, the less for other purposes.
“It’s definitely a worry,” Andrew Kenningham, chief Europe economist at Capital Economics, told me.
At the end of 2021, Greece had the highest debt-to-GDP ratio in Europe at 193%. Italy was next at 151%.
Europe is in better shape than it was the last time the ECB started raising rates in the run-up to the region’s debt crisis.
Greece’s economy, in particular, has been beating expectations for growth, and it has favorable conditions on its debt that make repayment less of a concern. But that’s not the case in Italy, which will need to refinance its liabilities sooner, and where growth has been dragging.
“Italy has not done enough serious reforms,” said Holger Schmieding, chief economist at Berenberg Bank.
The ECB has said it would step in and resume bond-buying if the situation deteriorates rapidly. Yet exactly when it would intervene isn’t clear, making investors increasingly nervous.
“The ECB can contain the problem if they want to,” Kenningham said. But they haven’t laid out their “pain threshold,” he added.
US stocks finish in a bear market
The latest: Inflation and recession fears had eased somewhat at the end of May, and stocks regained some ground. But Friday’s miserable report on consumer prices caused the mood to deteriorate again as investors fretted about the Fed’s next moves.
That brought an end to the eye-popping rally stocks had experienced since March 23, 2020.
Remember: Stocks had briefly fallen into bear market territory on May 20. Then a late-day rally rescued the market from closing below that level for the first time since the early days of the pandemic.
Now it’s official. The latest bull market lasted just over 21 months — the shortest on record, according to Howard Silverblatt, an analyst at S&P Dow Jones Indices. Over the past century, bull markets have lasted an average of about 60 months.
Still, the most recent iteration was powerful, lifting the S&P 500 to 70 record highs in 2021.
Cryptocurrencies also rode positive sentiment higher last year. Bitcoin touched a record high of almost $68,790 last November.
It’s now in free fall, hitting its lowest level since late 2020 on Monday, and sliding again Tuesday. Two of the world’s biggest crypto platforms restricted activity amid the meltdown, raising concerns about market stability.
Democrats call for a windfall tax on oil profits
Last week, I wrote about how Exxon’s surging profits have lifted its stock to its highest level in years. But it’s not just investors that are paying attention.
Progressive Democrats are also honing in on the good fortune of oil and gas companies as they hunt for ways to show they’re working to address the consequences of rampant inflation.
Calls are growing for Exxon and its peers to give some of their hefty profits back to Americans who are struggling under the weight of higher prices, especially after the Conservative government in the United Kingdom introduced just such a measure last month.
“The oil companies are raking in record profits and yet they are increasing their prices at the pump. To me that just makes no sense,” Robert Reich, who served as Labor Secretary under President Bill Clinton, recently told CNN.
The White House may agree.
“It’s outrageous that oil and gas companies are able to take advantage and make four times the profits that they made when there wasn’t a war,” Bharat Ramamurti, deputy director of the National Economic Council, said last week. He did not rule out support for a windfall profit tax.
Big Oil is pushing back hard. The American Petroleum Institute said in a statement that raising taxes on the industry will discourage investment in new production, which it said is “exactly the opposite of what needs to happen.”
“It’s unfortunate that some policymakers continue to be more focused on scoring political points with tried-and-failed policies rather than advancing solutions that could actually address the factors behind rising prices,” said the industry lobby’s senior vice president of policy, economics and regulatory affairs.
The Producer Price Index for May arrives at 8:30 a.m. ET.