Bond Market Is Overplaying the Risk of a Deep Recession

When banks started going belly-up, the reaction in bonds was emphatic. Two-year Treasury yields slid a percentage point over three days in March, the most since 1982.

For traders accustomed to treating such signals as sacrosanct, the message was obvious. Gone were the days when inflation was their main menace. Rates showed stress in the financial system made a recession inevitable.

Or did they? Three weeks later, questions won’t stop swirling about what to make of fixed-income volatility that for all its ferociousness remains mostly absent in equities and credit.

Explaining the divide has become a Wall Street obsession — an urgent one, given the sway Treasuries hold in models designed to divine the future of inflation and Federal Reserve policy. One concern is whether things having nothing to do with the economy — bearish positioning among speculators, specifically — made the big drop in yields a recessionary false alarm.

“Each day that there isn’t a banking crisis is another day indicating that the current pricing doesn’t make sense, but it’s going to take a while,” said Bob Elliott, chief investment officer of Unlimited Funds, who worked for Bridgewater Associates for 13 years.

As usual in markets, the debate is far from settled, and the lurch in yields may end up being what it usually is: a grim signal for the future of the economy. While oases of calm at present, stocks themselves are a long way from sounding an all-clear. Their big declines last year, and the dominance of megacap technology shares atop the 2023 leader board, can be viewed as portents of trouble. Similar wrinkles exist in corporate credit.