Bonds 'often underestimated by investors' amid inflation, economic conditions: Strategist

AlphaSimplex Chief Research Strategist Katy Kaminski returns to Yahoo Finance Live to discuss the markets, the possibility of a recession, inflation, Fed funds rate, and the state of the economy.

Video transcript

- The stock and bond market cannot seem to agree on whether a recession is going to hit the economy. The stock market seems to be pricing in a soft landing. The bond market is expecting an economic recession and maybe rate cuts by the end of the year, as we were just talking about. Which of them is right?

Katy Kaminski is back with us for the conversation. Katy, this has been-- I mean, this is tension that periodically comes to foreign markets. This year, though, it's definitely been there. So we were just talking about it seems like you think that maybe the stock market's going to be right on this one. What do you think?

KATY KAMINSKI: Oh, yeah, this has been hard. I mean, last year-- I mean, I love this question. I mean, honestly, if you look at the markets today, you see equity markets are still kind of hopeful. They're thinking things are going to be OK. They're looking for the soft landing. We're hoping for cuts. They're sort of hoping that we can navigate a difficult scenario.

But bond markets are really still looking difficult. They're saying, we have an inverted yield curve. What does it mean to have a Fed pause with an inverted yield curve? And, thus, the bond markets are really significantly suggesting that either bonds are not priced correctly or we're going to see some sort of recession.

I personally, I'm hoping that the stock market is right. But I think bonds are often underestimated by investors. They think of them as just safe. And they don't realize that in this type of environment of inflation, bonds are what you need to look at.

That's what happened last year. Last year it was the bond market that led the way. And it told us what was really happening. And the equity market was just bouncing around. I don't know. What do you think, Julie?

- I don't know. I think that the people who are betting that we're going to see a cut before the end of the year-- well, I mean, the Fed has effectively said, we're probably not going to cut this year. They haven't said it in so many words, right? But I think that the-- I don't know. It's a tough-- I don't know either, Katy--

- Well, I mean--

- --by a lot.

- Yeah, believing that we're going to cut by the end of the year, that's-- I mean, there have already been-- Nomura was out early on saying that we were going to see a cut at the last meeting. And we all know how that played out. But the larger implications of if we were to see a cut or a massive pivot by the Fed, would that signal that there's something else so dire within the data that they're saying that they just have to pause?

KATY KAMINSKI: Exactly. I mean, I think that's what people don't realize. It's not that we're going back to the old normal. In fact, we've moved to a new normal, where inflation is so much higher.

So inflation has come down, but it is not low. And I think what's interesting today with the retail numbers, it tells us that. At some point, it's not sustainable for the investor. It's not sustainable for the consumer to have higher costs. And then we have to see what happens next.

And I think that's why this market, if you talk to anyone in this space, is challenging because it doesn't seem to be clear who's right. Is it bonds? Is it stocks? And we have very blunt monetary policy tools to deal with this issue. So I really think it's going to take a couple more months to see.