Bond markets are backing recession fears

The tide of inflation is turning, at least as far as the financial markets are concerned.

Inflation breakevens, derived from the bond market, show a sharp drop in forecasts over the last few weeks, both for the next 10 years and for the five years starting five years hence. The latter, closely followed by the Federal Reserve and known as the five-year/five-year, is right back to a level it reached in February 2021 before the inflation scare took hold.

Market technicians see signs that bond yields have formed a wave that has now peaked. The 10-year Treasury yield, the most important rate in the world of finance, looks very much as though it has just traced out a perfectly formed head and shoulders:

Even if you aren't entranced by technical analysis, it's certainly beginning to look as though yields are trending back down. That implies confidence that inflation will come under control without the need for the Fed to hike rates too often.

So the greatest concern may have moved from inflation to growth. In other words, we're now more concerned about a recession than about inflation, according to Bloomberg.

That shows up very clearly in the relative performance of stocks and bonds below:

Illustrated by the ratio of the prices of the most popular exchange-traded funds covering the S&P 500 and long Treasury bonds, investors have been shifting from equities to bonds.

Source: Bloomberg