Bond markets see no recession

Howdy readers.?I'm Phil Rosen, reporting from New York.?

On this day in 1940, Disney debuted "Pinocchio," and the nosy puppet became one of the most beloved characters in film history.?

I bring this up because some people say that, unlike the marionette, markets don't lie.?

In that case, it may be wise to heed?a key bond market signal?that's saying we'll avoid a recession after all.

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1. Depending on who you ask,?a recession may be far off or it may have already happened.?

But if you look at the bond market, there's a clear answer that seems to be forming: The US economy?won't enter a downturn this year or next.?

That's because the spread between?corporate bonds and Treasury yields is steadily narrowing, according to DataTrek Research.?

Underlying strength in debt markets?suggests resilience, rather than teetering.?

The spread between corporate bond yields and US Treasuries helps measure the risk appetite of bond traders. That spread widens in times when pain looks more likely and investors want to be compensated more for taking on higher risk.?

This likely comes as a surprise to some investors, because a year of climbing interest rates and elevated inflation has led most forecasters to?expect a recession sooner than later.?

"When markets are uncertain about future cash flows, spreads increase to compensate investors for that risk," DataTrek co-founder Nicholas Colas wrote in a note. "When markets grow more comfortable that earnings are stable or even increasing,?spreads tend to decline."

Over the past several months, the spread on the yields between those bonds has slipped to levels below the average seen in the five years before 2020, a?time of relatively calm waters.

That signals economic strength, and should be?reason for optimism?in the year ahead and beyond, the firm noted. As Colas put it:?

"Today's spreads are just slightly below the 2015-2019 averages, which says the corporate debt market is no more worried about a?sudden decline in corporate earnings?than it was in a period of relative financial and economic stability."

What's an indicator you are watching to keep tabs on the likelihood of a recession? Let us know in the comments.

In other news:

2. Bank of America recommended these 15 stocks right now.?This batch of names can give portfolios an extra boost when they beat earnings and sales expectations, Jim Carey Hall explained.?See his full list.

3. It'll be easier to find a home in certain places this year compared to others.?Housing inventory looks poised to grow while mortgage rates come down —?home lending firm Knock recommended scoping out these 10 cities for your next buy.?

4. This 54-year-old high school teacher owns 64 single-family homes in Chicago.?Dominic Kosteris bought his first home in 1996, and now he's profiting about $45,000 a month.?He explained his strategy to real estate investing and how to achieve financial freedom.

5. Artificial intelligence stock C3.ai extended its massive rally.?The mania surrounding ChatGPT has spilled over into a range of?names with exposure to AI, such as C3.ai.?The stock's Monday rally happened without any related company news.

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