Bonds, gold, and cake

Recently, we’ve noticed an odd pattern in the bond market wherein bond prices rise sharply on bad days for risk assets (equities), but on equally good days for risk assets, bonds don’t fall as much as you’d expect. Or, to put it more simply, we’re in a period of bond investors having their cake and eating it too. 

What’s happening here? On risk-off days, the bond market is behaving as a safe heaven asset, as it should in normal conditions. But there’s also a longer-term, speculative aspect to this story, in which investors are piling into the asset class as recession fears mount. For proof, look no further than the price of gold, which just hit a nearly 6-year high, up nearly 18% this year. We know that gold isn’t typically held as a long-term investment – it’s used as a hedge against inflation or a recession. Given, the recent inversion of the yield curve and concerns that the Fed won’t be as dovish as the market wants, it’s no surprise that short-sighted market speculators are piling into safe-haven assets like gold and Treasuries, looking to make a quick buck.


The last time we had a one-way market on bonds was in 2014-2016, when the ECB was pushing rates into negative territory and bonds around the world were bid as a result.  But at least at the time, it was a reality that was affecting the flow of money worldwide. Today’s reality is different: retail sales are impressive, employment continues to set record highs, wages are increasing and inflation is on target. Not exactly signs of impending economic doom. Yet the bond market continues to price in a massive recession right around the corner – last week, US 30-year yields fell below 2% for the first time in history, in no small part thanks to the aforementioned speculators. 

It’s undeniable that Treasuries are the most crowded trade in the world right now. We look at historically-low yields around the world and wonder how long this can possibly go on. After all, if you can have your cake and eat it too, eventually you’ll have to go on a diet. 

Jean-Guy Mérette

Vice President and Portfolio Manager
Active and Strategic Fixed Income Team