From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Bonds are off to their worst start in the past 40 years, possibly ever!
It’s not even close.
As we near the end of Q2, the US Treasury Bond ETF $TLT is down almost 22% year to date. And that’s after its recent bounce higher.
There's been nowhere to hide, as these traditional safe-haven assets have been an absolute dumpster fire along with stocks.
But we’re starting to see some of those flames extinguished.
Some of the worst-performing stocks tipped the bond market’s hand ahead of the recent lows. That’s right: Those Big Tech names and Chinese internet stocks stopped going down months ago and now bonds are following higher.
Believe it or not, bonds and high-duration equities have a lot in common. The Growth $IWF versus Value $IWD ratio really tells the story.
Let’s take a look.
Here’s an overlay chart of the TLT and the IWF/IWD ratio:
While bonds have sold off throughout the year, growth stocks have suffered a similar fate.
With rates rising, this is no coincidence.
Why?
Because both US T-Bonds and growth stocks are long-duration assets.
When interest rates rise, the value of bonds falls. Similarly, the valuations of many of these growth names get re-rated lower as the discount rate rises.
That’s exactly what we’ve seen this year.
The correlation between these areas has been strong on the way down and it’s still strong today as both of these long-duration assets start to find a floor.
This time around, growth had been leading bonds.
In the past few weeks, TLT reclaimed its May pivot lows and its former 2018 lows, which marked a major inflection point from the prior cycle.
These former lows are excellent levels to trade against from both a tactical and structural perspective.
We think this is a great opportunity to swing at some of these beaten-up market areas as a mean-reversion bounce is underway.
To be clear, this isn’t some grand thesis on interest rates. The structural downtrend remains intact for bonds.
This is simply a trade setup with a great risk/reward profile. JC highlighted some setups Monday night on our monthly conference call. You can click here to watch the recording.
Of course, we could be wrong. It’s highly likely as we’re trading against the underlying trend.
But we’re technicians. We manage risk. The beauty is that we’ll know soon if we’re wrong by keeping tight stops.
If and when the dominant trend reasserts itself. We’ll be ready to flip the book short, riding the next leg lower.
Countdown to FOMC
The market is pricing in a 75-basis-point hike at the July meeting next month.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of June 23, 2022.
Thanks for reading. Let us know what you think. And be sure to download this week’s Bond Report!
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