A Look at Bonds - Junk vs Treasuries

The Treasury Bond market has been a big topic of conversation as of late. Prices are making new highs and Yields are making new lows. High yield bonds got slaughtered early last month and have been very volatile, like stocks, since the lows were put in place on August 8th. The question going forward here in the Bond market is: Where would you rather be - Low Yielding Treasury Bonds or Higher Yielding (Junk) Bonds?

Is this an interesting chart or what? We're right at last August's lows where money started to flow out of Treasuries and into Junk. This chart looks at the ratio between $JNK (SPDR Barclays Capital High Yield Bond ETF) vs $TLT (iShares Barclays 20+ Year Treasury Bond ETF). The Market has memory here, a point of reference. A new low was barely put in place earlier this week, but quickly recovered. Will that trap the bears?

This pairs trade looks like a pretty damn good risk reward here. This market makes new lows and all bets are off. But if it does anything close to what it did last year when the ratio put these lows in place, you're looking a monster move to the upside. Easy risk/reward.

For you stock traders - If $JNK starts to outperform $TLT, I have to believe stocks do well in that environment. If the downtrend in this ratio continues, then stocks probably struggle - $SPX $DJIA.

Go get 'em!