U.S. bond bulls are winning in the global search for yield.
As shown in the LPL Chart of the Day, negative-yielding debt around the world has grown to $10.4 trillion, its highest point since September 2016. At the same time, the 10-year Treasury yield fell 31 basis points (0.31%) in March as prices jumped, and the Bloomberg Barclays Aggregate Bond Index notched its best monthly performance in four years.
Recent strength in fixed income has been interesting, especially amid the S&P 500 Index's best first quarter in over 20 years. Typically, equities and bond prices move opposite of one another. However, that relationship has broken down this year as global rates have felt the sting of a worldwide growth slowdown. Yields on sovereign debt for developed nations have dropped 20 ­­to 30 basis points (0.20-0.30%) year to date, and investors in Germany's debt are contending with negative bund yields for the first time since 2016.
While the U.S. debt binge has lifted bond bulls' portfolios, it has indirectly fueled investors' worries about impending economic weakness and slowing inflation. Insatiable global demand for U.S. Treasuries has weighed on long-term rates, skewing economic signals from the bond market. At the end of last month, the spread between the 10-year and 3-month Treasury yields turned negative for the first time since 2007, sparking concerns that bonds could be hinting towards an impending recession. Most economic indicators we follow contradict this message, and we see low odds of a recession in the next year.
Overall, we believe that foreign demand has led to an overreaction in U.S. bond markets, to the benefit of some investors and the detriment of others. While we think global demand for U.S. debt will be higher this year, we expect recent buying pressure to ease if trade risk subsides and global data improve.