This Is a Market Only Gordon Gekko Could Love

Judging by the performance of markets this week, it’s hard to come to any other conclusion than investors have gotten a bit too greedy. The S&P 500 Index closed at a new high Thursday, contributing to what is already one of the five best months for stocks globally since 2010. It’s a similar story for junk-rated debt and emerging-market currencies. But where greed seems to be out of control is in the market for sovereign bonds, which is usually viewed as the adult in the room.

In the span of just a few days, the talk in the U.S. Treasury market has gone from whether the Federal Reserve will lower interest rates to how much of a cut they will make next month. While the odds of a 25-basis-point reduction are now 100%, the probability of a 50-basis-point cut has shot up to a not-so-insignificant 35%, according to data compiled by Bloomberg. This is why the yield on the benchmark 10-year Treasury note – which helps determine borrowing cost for the government, businesses and consumers – fell below 2% on Thursday for the first time since 2016. Morgan Stanley is one firm that is officially forecasting a half-point cut next month. “Cut, then verify,” the firm’s economists wrote in research note dated Wednesday. A reduction of that magnitude “that is delivered with flexible language”’ would allow “the Fed to be nimble in the event that 50 (basis points) is not enough to offset the downside risks to the outlook.” That makes sense, but is the outlook really that dire? As recently as last month, the Organization for Economic Cooperation and Development forecast the U.S. economy would growth at a respectable 2.8% this year, versus 1.2% for the euro area and 0.7% for Japan. Also, financial conditions as measured by Bloomberg are already loose, with no sign that current rates are constraining businesses and consumers.