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A gut check for bonds in the week ahead?

A gut check for bonds in the week ahead?

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A gut check for bonds in the week ahead?

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It was a busy week on Wall Street with stocks hitting new record highs, bonds hitting new lows for the year and a flurry of new merger activity. Next week promises some big news on the economy, including the jobs report for May.

Yahoo Finance Editor-in-Chief Aaron Task says the fact that 10-year bond yields (^TNX) hit a new low for 2014 at 2.40% this week may be a warning of sorts on the economy. “It’s a sign, of course, that the bond market isn’t at all worried about inflation and may be telling us that the economy... isn’t as strong as the economists are expecting,” said Task.

But the low yields are helping to fund some of the m&a activity that started to pick up this week, spreading beyond the pharmaceutical sector to food and cable. Yahoo Finance Senior Columnist Michael Santoli says the takeover excitement is arguably overdue. “Companies have had cash, stock prices have been high, but we’re really starting to see it take hold,” he said. “I think it’s probably going to continue.”

In addition to the boost in merger activity, there also was a boost in some momentum names that had been beaten up in recent months. Breakout host, Jeff Macke, says the combination of merger activity and a return to momentum is bullish for stocks. “I think the market really came to a crossroads here at the end of May, about the third week in, where you saw stuff like Facebook (FB), Tesla (TSLA), Amazon (AMZN), all those companies that had just been beaten all to heck reversed and they moved smartly higher all last week and this week and really that momentum tells you (this is) a distinct change in the nature of the tape.”

What to watch

In the week ahead, there will be a lot of news on interest rates and unemployment rates that could derail the record run of stocks and recent rush into bonds.

The European Central Bank is widely expected to cut interest rates and many are waiting to see if ECB President Mario Draghi will begin a stimulus program along the lines of the Federal Reserve’s quantitative easing plan. “If they don’t do that or if they don’t cut rates, for sure, there could be a big reversal in some of the debt markets,” said Task.

Santoli believes U.S. debt markets will be watching something else closely as well next week: the May jobs report. “We’re in a mode right now where we want to see a strong number,” he said. “218,000 is seemingly the forecast right now and I feel like if we get much above that, that’s going to probably create that gut check for the bond market that we’ve been waiting for.”

For his part, Macke says he’ll be paying close attention to the momentum plays next week, rather than have laser focus on economic data. “Where the real rubber hits the road is stocks and as long as we continue to keep this momentum going in stocks, the economic data really can just get you in a lot of trouble,” he said. “The best way to (accumulate wealth) at new highs in the market is to… make sure that the market psychologically is ready to move higher.” He says “that’s the way you make money in momentum tapes.”

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