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Bonds telling less bullish tale than stocks

The stock market is saying everything is A- OK in the financial world, but the U.S. government bond market is telling a different, perhaps darker, story.

Bulls drove the Dow Jones industrial average to a closing high Monday for the 12th consecutive trading day. The last time the Dow went on a similar recordsetting run was January 1987.

Stock pros’ optimism is twofold: a recognition that the economy remains in solid shape and a belief that President Trump will be able to get his pro-growth economic policies enacted.

But that unwavering optimism is not being shared in the bond market. Bond yields have been falling in recently, which means prices have been bid up by investors. Bonds are viewed as lessrisky, less-volatile assets compared to stocks. Normally, investors flee bonds in good times and move their cash to risk assets such as stocks, which offer bigger return potential. Monday, though, the yield on the 10-year Treasury fell to 2.37%, two weeks after topping 2.5%.

One theory for the stock-bond disconnect is bond investors believe Trump’s fiscal stimulus plans might be delayed or not as big as previously believed, Andrew Hunter at Capital Economics says. The U.S. Federal Reserve, these bond pros say, might not need to be as aggressive with interest rate hikes. And that prompts the question: If the “Trump bump” isn’t going to be as powerful as forecast, why is the stock market still surging?