Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Bond Market Flashes Warning To Stocks: Stocks Don’t Listen

Published 04/05/2013, 12:22 AM
Updated 05/14/2017, 06:45 AM
Bond market flashes warning signal to stocks and only one of these asset classes can be right.

As everyone knows, the bond market and the stock market tend to move inversely to each other. As stocks rise, bond prices fall and bond yields rise.

As stock market prices fall, bond market prices rise and bond market yields falls.

This is simply a reflection of the flow of capital between “risk on” and “risk off” assets and tends to be reliable over long time frames.

However, in today’s central bank influenced, Wizard of Oz economy, interesting divergences are now taking place between the bond market and the stock market.

UST10Y

In the chart above, its easy to see how 10 year bond yields (IEF) and the S&P 500 (SPY) tend to move in harmony. As the S&P 500 (SPY) rises in price, bond yields (IEF) tend to rise and as the S&P 500 falls in price, bond yields tend to fall and bond prices rise which is the natural flow of supply and demand in U.S. financial markets.

Now, however, we see a sharp divergence between these two asset classes as the S&P 500 continues to climb while the yield on the 10 year Treasury bond has entered a steep decline.

What this means is that the stock market as represented by the S&P 500 is bullish and continues to climb while the bond market is saying that money is migrating to the safety of bonds and so driving bond yields down and bond prices up. The bond market is saying that today’s environment is a “flight to quality” environment and that “risk on” assets are simply too risky.

A similar divergence occurred last May when bond yields started collapsing while the S&P 500 index (SPY) held steady, but soon the S&P 500 followed with a decline of nearly 9% between early May and early June.

In the chart below, recent activity in iShares 7-10 Year Treasury Bond ETF (IEF) is depicted:

IEF
It’s glaringly apparent that bond prices have spiked in spite of recent record closes by the S&P 500 (SPY) and Dow Jones Industrial Average. (DIA)

This chart is not indicative of a confident market, by any means, as 10 year bond prices (NYSEARCA:IEF) tend to spike in times of distress or uncertainty.

Bottom line: So now the question is, which market is right? Are stocks, as represented by the S&P 500 (SPY) correct, or is the bond market, (NYSEARCA:IEF) which is generally described as being the “smarter” of the two, correct in its assessment of current conditions. We’ll find out soon enough as, sooner or later, the bond market and the stock market will have to start listening to each other.

Disclaimer: The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector’s Disclaimer, Terms of Service, and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.