NEW YORK (MarketWatch) -- For those investors who believe the stock market works perfectly at discounting risks and rewards, the U.S. economy and corporate profits must seem to be on track for a stellar recovery.
After a spectacular 50% surge since March, stocks -- as measured by the broad S&P 500 index (SPX 1,035, +9.35, +0.91%) -- have continued rising through the summer and into September.
Yet, the market for U.S. government bonds, considered among the safest assets around, seems to be telling a different story.
Demand for benchmark 10-year Treasury notes surged over the past month, sending their yields (UST10Y 3.51, +0.03, +0.80%) down by about 40 basis points. Bond yields move inversely to price.
Government bonds provide fixed income over periods of time. This means that longer-dated bonds, such as the 10-year note, are more susceptible to inflation as fixed income loses value if prices rise in general.
When bond prices rise and their yields fall, it generally means that the chance of rising inflation is waning -- along with the outlook for economic growth.
Strong demand for even shorter-dated maturities, such as the 3-year notes sold at a government bond auction on Tuesday, is now raising doubts about the economic outlook among a number of market strategists.
"What does it say about the view on economic growth that there is such big demand for the three-year note?" asked Peter Bookvar, equity strategist at Miller Tabak, in a research brief.
"Why isn't this money going into riskier assets? Again, it's another data point of the disconnect between the U.S Treasury market and equities," he said.
On Wednesday, U.S. stocks again made broad gains.
The Dow Jones Industrial Average (INDU 9,570, +72.40, +0.76%) continued to advance, rising 30 points, or 0.2%, to 9,527. The Nasdaq Composite (COMP 2,065, +27.21, +1.34%) gained 15 points, or 0.8%, to 2,052, while the S&P 500 added 4.3 points, or 0.4%, to 1,029.
Government needs
Contrasting with the recent trend, government debt fell and yields rose, as the Treasury Department was set to sell $20 billion in benchmark 10-year notes, the second of three major note and bond auctions this week. Yields on 10-year notes were up 2 basis points at 3.506%.
