The Shift Taking Place In The Bond Market

Aren’t Fed days fun? Bernanke gets to put on his suit and comb his beard to go out and talk to the nice reporters and tell the world what the FOMC thinks about the U.S. economy. Luckily, we get to make a day of it. CNBC fills your screen like Hollywood Squares of analysts, economists, and mutual fund managers. Yesterday didn’t disappoint. The market took its cue and was trading all over the place during the last hour after the announcement was made, only to take a dive in the last hour and a half before closing at the low. Pre-market it looks like we will be having another test of the 50-day moving average and as J.C. penned this morning – the 1600 level may be the bulls last stand.

But enough about that, lets talk about bonds!

Okay I know it’s not the most exciting topic, but many would argue there isn’t a more important market in the world. Today I want to look at the ratio between the 10-year Treasury Yield (TNX) and the 30-year Treasury Yield (TYX). This ratio has been falling for years as money flowed into the middle of the yield curve, thus knocking down the 10-year yield.

Recently the bond market has been making a shift, with the 10-year taking a relative performance backseat to the longer-dated Treasury’s. This can be seen in the chart below, as the green line rises the 10-year yield is outpacing (gaining more or losing less) than the 30-year yield. And since price is inverse to yield, if the ratio between the intermediate term bonds is rising against the long-dated, then we can make the assumption that 30-year bonds are outpacing their 10-year brethren.

However, as with most things that go up, we have hit resistance. Yesterday’s Fed-induced malaise has pushed the ratio between these two yields to highs last seen in March ’12 and October ’11. We also have elevated momentum, which as I’ve discussed before is not necessary a bad thing. Going forward we’ll see if resistance can be broken and if the 2011 high will be tested. Time shall tell.

While equities are sexier, we can’t take our eye off the bond market.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.