Something is cooking in the grain and livestock futures markets. Corn (ZCH25) and wheat (MWH25) futures bulls have come to life, as have lean hog (HEJ25) futures bulls. Live (LEJ25) and feeder cattle (GFH25) futures prices remain elevated. And although soybean (ZSH25) and soybean meal (ZMH25) futures bulls are still struggling, those markets have at least established price bottoms. It seems that one bullish, fundamental catalyst has been flying under the radar screen: historically tight U.S. corporate bond-U.S. Treasury yield spreads.
Credit Spreads Impacting Grains and Livestock Futures? Do Tell!
The spreads between U.S. corporate bond yields and U.S. Treasury yields have narrowed considerably in recent months. Corporate bond yields fetch a higher rate than U.S. Treasury yields because corporate bonds are deemed riskier assets than U.S. Treasurys, which are considered some of the safest investments in the world.
Bloomberg reported this week: “Price moves in the global credit market are so calm that some money managers are wondering whether a relentless rally in corporate bonds is becoming a red flag.”
Investment-grade corporate bond spreads — the premium in yield that corporates pay over ostensibly risk-free U.S. government bonds, notes and bills — is the narrowest in almost two decades. Some corporate bond traders are exiting the asset class because the slim returns are not worth the risk of owning corporate bonds. Still, money flows into corporate bond funds have been strong. Corporate bonds still have attractive coupons, or interest income, of more than 5% annual yields. That’s significantly more than U.S. Treasurys are presently offering.
Bloomberg added, “The broad-based buying of U.S. corporate debt has depressed metrics of volatility to the point where movements in risk premiums have rarely been as tranquil in recent years.” This somewhat contradicts the potentially disruptive nature of President Donald Trump’s foreign and trade policies.
Why is this important for ag markets? What this means is that Trump’s pro-business and government-spending-reduction policies are superseding his potentially disruptive trade, domestic and foreign policies, from a financial marketplace perspective.
Stock indexes are near their record highs again this week, while the U.S. dollar index ($DXY) has backed well down from its January high. What this suggests is that U.S. interest rates are more likely to remain stable or even decline this year rather than to increase. Investors can also extrapolate that global interest rates will do the same. That’s a bullish scenario for raw commodity markets, including grains and livestock.
The Smartest People in the Room…
I have said it many times: Veteran markets watchers believe bond traders are the smartest people in the room. I do too. The bond markets are telling us right now that the Trump administration’s trade and foreign policies may be disruptive to some market segments, but not to the degree that the marketplace becomes roiled or overly anxious. The Trump administration’s actions have been and will continue to feel like speed bumps as opposed to one lane of the highway being closed.
The bond markets are presently signaling no major marketplace disruptions from the Trump administration and indicating that his controversial government-spending-reduction moves are long-term friendly for a stabler and more sustainable U.S. government financial posture.
The bond markets are suggesting general marketplace risk aversion is not seriously elevated at present. This is a scenario that, if it continues in the coming months, will be significantly bullish for the raw commodity sector because it suggests continued better global economic growth, led by the U.S. That means better demand for raw commodities around the globe.
It could be that when the grain futures markets began to rally a few weeks ago, which surprised many grain traders, part of the reason is because the tight credit spreads were signaling lower interest rates, lower inflation and better global economic growth.
