Oil prices surge to two-week winning streak as Iran supply fears grip markets
The top graph below, courtesy of Bloomberg, shows that the price of TLT, the 20+ year Treasury bond ETF, has been drifting sideways for the last couple of years. Often, when a security trades in a tight range over an extended period, as we see with bonds currently, a breakout from the range can be strong. Accordingly, we present five factors suggesting a significant breakout could favor higher prices and lower yields.
- As we share in the Tweet of the Day, the average true range (ATR) on TLT, which measures the average daily difference between each day’s high and low over 50-day periods, is at its lowest level since 2010. The range is extremely tight; thus, the odds increasingly favor a breakout.
- The bottom graph below, courtesy of Bloomberg and Bianco Research, shows that the short position on TLT has been steadily climbing over the last few years. If these short traders need to cover their positions, their purchases could send bond yields much lower.
- While job growth continues, the employment situation is weakening. The ratio of job openings to the number of unemployed people is now below 1.0, the lowest level since 2021. Weak employment should cool the economy and inflation, pushing yields lower.
- As we have noted in a few recent Commentaries, the Truflation real-time inflation index is plummeting. Given the strong correlation between bond yields and inflation, this index portends much lower bond yields.
- Fannie Mae and Freddie Mac are buying mortgages again. This will remove fixed income supply from the market, providing a bid for all bonds.
Market Concentration- Beware
Two weeks ago, we published AI Bubble: History Says Caution Is Warranted. The article helps readers appreciate whether we are in an AI bubble.
The book is based on the work of innovation economist Carlota Perez and her acclaimed book, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. Per her research, one of the hallmarks of financial bubbles forming around major technological innovations is market concentration. To wit, we wrote the following:
Speculative bubbles are also characterized by market concentration. Capital flows disproportionately into a small number of perceived winners. As market breadth narrows, index performance becomes more dependent on a handful of stocks.
This has been incredibly obvious over the last few years, as shown below courtesy of Visual Capitalist. A small number of mega-cap companies, including many of the Magnificent Seven, dominate AI-related investment narratives, index returns, and capital flows. Investors assume these firms will capture most of the future profits simply because they are early leaders.
To help put her message into the current context, we share the graph below, courtesy of Apollo. The Herfindahl-Hirschman Index measures the distribution of market caps of an index’s underlying stocks. The higher the number, the greater the concentration, meaning fewer stocks are driving market performance. As the graph shows, this index has risen significantly since the pandemic. Similarly, it increased before the dot-com crash, albeit not by as much. The current high concentration is not only a common trait of innovation-led financial bubbles but also highlights the systemic risk if the largest stocks reverse sharply.
Tweet of the Day
