As you know, bonds have been truly hated for the last 2 years or so. The way to think about it is that bonds do not do very well in the rising interest rate environment and, well, the rates have been rising in the past two years quite aggressively.
An increase in interest rate, along with uncertainties surrounding inflation on whether or not it is going to be sticky, has been one of the many reasons that bonds have sold off. So the question arises, when do bonds actually perform well? Bonds provide a steady cash flow in form of interest (coupon payment) and these steady payments become very attractive in times of economic uncertainty, i.e. recessions. So you would expect that the bonds will do very well during recessionary times.
Predicting the timing of the recession is what is very challenging, there are however signs that the economy is slowing down.
1. Sahm Rule:
The Sahm Rule identifies signals related to the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.
Below is a chart that uses the Sahm Rule as a signal for a massive rise in the unemployment rate and the signal was just turned on. It is important to note that this data has false positives as well and cannot be fully trusted.
2. ECI Mean Reverting
One of the leading signs that the economy is slowing down is the ECI or employment cost index. It is finally moving lower to its previous mean reverting level of pre-pandemic.
3. Falling Exports of China
Another sign of economic slowdown is China's exports. China exports usually lead US economic activity by about 6 months, we just had one of the smallest amount of exports in the past 6 months.