The fact that investors refuse to shy away from Treasurys, which offer a negative real yield for maturities up to 10 years, shows the economy is in deep trouble, many experts say.
The Federal Reserve may feel compelled to embark on another round of quantitative easing (QE3) after QE2 expires June 30, they say.
That would be the kiss of death for the economy, says Peter Schiff, president of Euro Pacific Advisers.
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Peter Schiff
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“Try double dip and then triple dip (recession),” he tells CNBC. “As long as we get stimulus, any ‘recovery’ sows the seeds of its own destruction.”
David Rosenberg, chief economist at Gluskin Sheff, also sees negative signs in the bond rally. It “has to be causing the growth bulls just a little bit of discomfort,” he wrote in a note obtained by CNBC. “This should not be happening if, in fact, the current slowdown is a mere temporary ‘soft patch.’”
Some point to the stock market’s 18 percent rise as evidence the economy will sustain recovery. But Rosenberg says that’s just evidence that when stocks rise, experts turn bullish on the economy, while if bonds rise, “the pundits always claim it is the sale of the century.”
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Many economists agree with Schiff that QE3 isn’t the solution.
“There’s not much else that the Fed can do,” Michael Franzese, head of Treasury trading at Wunderlich Securities, tells Bloomberg. “The economy remains stagnant.”
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