Last week, long-term bond rates fell despite a surge in US inflation, a move that some market observers are interpreting as a potential bottom for bonds and other battered assets. The counterintuitive reaction, where prices dropped on bad news, has long been considered a signal of a market bottom, though this idea has never been rigorously tested.
Growing up in a family of stockbrokers, the author absorbed several market adages, one of which suggests that when prices stop responding positively to good news or negatively to bad news, it may indicate a top or a bottom. The recent bond market behavior seems to fit this pattern, prompting some to consider it a buying opportunity.
The drop in bond rates came amid a hot US inflation report, which typically would push yields higher. Instead, the opposite occurred, suggesting a shift in market sentiment that could extend to other assets that have suffered from rising yields.