U.S. stocks, bonds flash diverging signals as volatile first quarter ends

NEW YORK (Apr 1)) - Which market has it right?

With the first quarter of 2022 over, the U.S. stock and bond markets appear to be conveying drastically different assessments of the growth outlook, leaving investors to decide which view will prevail.

The S&P 500 has come roaring back from a near-13% decline and finished the quarter off 4.9% after a rebound that has defied worries over tighter monetary policy and geopolitical instability stemming from the war in Ukraine. Many stock investors have even shrugged off a brief inversion of a closely watched section of the U.S. Treasury yield curve – a phenomenon that has predicted past recessions.

Bond investors appear far more pessimistic on the economy, with the ICE BofA index on track for its worst start to the year ever on worries that the Fed will cause recession by aggressively tightening monetary policy in its bid to fight surging inflation. Yields on the benchmark 10-year Treasury are up 81 basis points this quarter and stand near their highest level since May 2019. read more

Illustrating the countervailing forces in markets, the CBOE Volatility Index (.VIX) - viewed as a gauge of fear in equity markets - stands not far from its lows of the year, with investors pinning the reversal in stocks on everything from quarter-end rebalancing to buying from retail investors. At the same time, the ICE BofAML MOVE index (.MOVE), which tracks Treasury yield volatility, remains elevated.

"Rates markets are very consistent in telling a story where the Fed is going to do some damage to the economy, (while) risk markets have not really done a good job of pricing any significant damage to the growth outlook," said Edward Al Hussainy, senior interest rate and currency analyst at Columbia Threadneedle. "One of these stories is wrong."

REUTERS