Low yields on U.S. Treasury bills, notes, and bonds are good for stocks. They make bonds look less attractive and stocks relatively more so.
But falling yields that are caused by buyers flocking to Treasuries aren’t a good sign. The decline in yields then is a signal of a falling appetite for risk.
And if the buying is taking place when yields are already extremely low, it’s an especially worrying signal. Buyers are saying that they’ll take almost any yield–in fact, they’ll take almost no yield–in order to play it safe.
That’s what we started to see at the end of last week.
The yield on the 10-year Treasury note fell to its lowest level in roughly four months.
This warning of a decline in the appetite for risk–bad for stocks since investors see them as riskier than bonds–from falling Treasury yields is backed up in recent days by big drops in indexes that track the riskiest of bonds, those rated below investment grade and commonly known as junk bonds. On Thursday, when stocks fell heavily, so did junk bonds.
That’s exactly what you’d expect if investors are looking to reduce their market risk .