Tags: Bonds | Long | Slow | Recovery

Bonds Signal Long, Slow Recovery

Sunday, 07 Apr 2013 11:04 AM

By Michael Kling

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Rising stock markets have predicted an accelerating economy, but bond markets expect a prolonged slow recovery.

Bonds are probably closer to being correct, experts say.

Pundits predicted a "great rotation," saying bond investors would swing into stocks. Yet that hasn't happened. Bond investors still cling to their fixed-income investments. Meanwhile, stock investors poured money into equities in the first quarter, sending indexes to new highs.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

"They're sending different signals. As to who is right, I would put more faith in the bond market," David Santschi, CEO at TrimTabs, told CNBC. According to TrimTabs, investors sent $52 billion into stock funds and stock-based ETF in the first quarter, the most in nine years, CNBC reports. Still, they didn't rotate out of bonds, as fixed-income funds took in $65.7 billion, the most since 2006.

The strong inflows into fixed income funds indicate bond investors are worried about growth prospects.

"Nobody really has it right necessarily, but bonds typically get it more right, more often," Kim Rupert, managing director of global fixed-income analysis at Action Economics told CNBC. "The rally in bonds is a bit overextended, but I do think they're on the right track that things are going to be pretty slow for a while. We're not going to see a real pick-up in economic activity anytime soon."

Recent economic data suggests the bond market may be right. The Labor Department reported last week that just 88,000 jobs were created during March, well below expectations. Economists had forecast 190,000 new jobs, according to MarketWatch.

The unemployment rate fell slightly to 7.6 percent, but that was largely due to job hunters dropping out of the labor market. The participation rate, the number of working-age people working or seeking work, dropped to 63.3 percent, the lowest since 1979.

“This inconsistent pattern of jobs growth is pretty consistent with the slow growth economy that we’re in,” Christopher Keith, senior vice president and fixed-income manager at Adviser Investments, told MarketWatch. "Anyone who has been predicting the demise of the bond market is going to be in for a longer wait than they anticipated."

The economy is expanding but not accelerating, Steve Blitz, chief economist at ITG Investment Research, wrote in a note to clients, MarketWatch reported. The jobs report, he wrote, should end speculation that the Federal Reserve will slow its monthly bond purchases.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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