Bonds broke to new lows for the year. Right on cue, the doom crowd is calling tops on stocks.
They’ve been wrong every month for years. They’re wrong again.
Today I’m showing you the only two bond market signals that actually matter for equities. I’ll also tell you exactly what a real warning sign looks like.
Get this framework right and you can stop flinching every time the 10-year ticks higher.
Kevin Warsh got confirmed as Fed Chair in the same week bonds hit those new lows. He’s a historical hawk, and that timing matters.
My view is Warsh ends up being the Fed Chair who ushers in yield curve control to the U.S. A crisis has to come first, but that’s the path.
Keep that in the back of your mind as we work through what bonds are signaling right now.
A couple of hot inflation reports just hit. Rising prices are sticking around, and yields are reflecting it.
Higher rates scare investors. Pundits make it worse by claiming higher yields automatically tank stocks.
Those folks are trapped in old-world rules. The rules they’re using worked from 1982 to 2020, when bonds were in a 40-year secular bull market.
That world is gone.
Stocks and bonds positively correlate much more often in an inflationary regime. The surface read misses the real story, which lives in two places:
The shape of the yield curve
The behavior of credit spreads
What the Yield Curve Says
Different bond maturities carry different yields. The market plots them on a curve from 30-day bills out to 30-year bonds.
Right now that curve is steepening. Longer-term yields are rising faster than shorter-term yields.
Historically, a steepening curve is a growth signal. It’s also an inflation signal because growth eventually pushes prices higher.
A steepening curve is absolutely not a recession or bear market signal. Pockets of volatility show up along the way.
The broader message is that bonds are pricing in growth.
Bear markets in equities are disinflationary events by their very nature. The curve would need to flatten and re-invert before I’d start worrying about the bigger trend.
What Credit Spreads Say
A credit spread compares yields on two bonds with similar maturities but different issuers. The common comparisons are Treasuries against junk bonds and Treasuries against investment-grade corporates.
I get into the specifics with the Trinity Trade crew every week.
If you’re bullish, you want spreads narrowing or stable. That happens when junk and corporate yields drop more, or rise less, than Treasury yields.
Narrowing spreads are a major liquidity signal. Investors aren’t demanding much extra compensation to hold riskier credit, which means the plumbing of the market is working.
Equity corrections with stable spreads tend to look one specific way. They drag on, they get boring, and they put people to sleep.
We saw exactly that from October through March before this last rally kicked off.
The corrections that actually hurt happen when spreads blow out. Junk yields rip higher while Treasuries stay put, and risk gets repriced fast.
That blowout is the warning sign. We are nowhere near it today.
The Bottom Line
The yield curve keeps steepening. Credit spreads remain stable.
A bear market in stocks is not on the table while both of those conditions hold. The bond market itself is giving you permission to stay long.
I argue with AI about this stuff more than I should admit. I usually win, because the data is on my side.
Ignore the noise and focus on price. This is still a bull market until the data says otherwise.
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