What's going on?

The prices of key government bonds in both the US and Europe hit their highest levels in two months on Wednesday, signaling a potential shift in investors� outlook for the global economy and financial markets.

What does this mean?

Less than two months ago, the financial world was awash with fears that falling bond prices would drag down stock prices, leaving many shaken and stirred. As bond prices fall, the interest rates (a.k.a. yields) they offer new investors rise. The worry was partly that these lower bond prices would tempt investors away from stocks and into bonds.


Now, however, prices have risen � especially for longer-term bonds (those that expire in 10-30 years). Short-term bonds, which offer interest rates that are more sensitive to central banks� policies, have remained at lower prices (and higher yields).

Why should I care?

For markets: The bond market is potentially signaling choppy waters ahead for stocks.

The upshot of all this is that short-term borrowing costs for companies remain much higher than they have been in recent years (the interest rates companies have to pay on loans is closely linked to bond yields). Many companies� profits are therefore taking a hit. At the same time, the fact that investors are prepared to accept lower bond yields over the long term may be a sign that they�re worried economic growth will slow � hitting companies� profits (and stock prices) further.


The bigger picture: A �flight to safety� is playing out.

There�s a lot going on in markets right now. Tech stocks are having a torrid time amid fears that greater regulation will cut into profits and that China may respond to US trade restrictions with measures of its own aimed at US tech firms. Thanks to these (and other) concerns, stock prices are swinging like a gate in a gale � and are set for their second straight month of losses. In this volatile environment, investors� natural reaction is to flock to the security of boring but dependable government bonds, especially from major countries like the US and Germany.