From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

TIPS versus Treasuries is one of the most important charts we’re watching right now, as it's hitting its highest level since early 2013. Relative strength from TIPS hints that investors are positioning themselves for a sustained surge in inflation.

This makes sense given both the five- and 10-year breakeven inflation rates have reached their highest levels in more than a decade. 

As investors react to signs of impending inflation, many cyclical stocks that benefit from higher rates are catching a bid. A great example of this is the Metals and Mining ETF $XME.

Let's take a look!

Below is a chart of XME overlaid with the TIPS versus Treasuries ratio and correlation study in the lower pane:

If investors are anticipating higher inflation in...

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Last week, we touched on the weakness that’s been developing further out on the yield curve.

The long end simply hasn’t kept pace with shorter-term yields. This is understandable given the magnitude of the move in the 30-year since summer 2020. At some point, the shorter end of the curve needs to play catch up. And it’s done just that these past couple months.

Now it’s time to focus on longer-term rates, as further downside pressure will eventually put the current economic recovery into question.

Let’s put the recent action in rates into perspective as we head into year’s end.

Below is a chart of the US 30-year yield:

After testing a key level of former support turned resistance around 2.23, it’s slipped back toward its summer lows.

If the 30-year yield continues to fall and takes out its former lows around 1.78 that does not bode well for...

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

We’ve been pounding the table about rising rates for over a month now.

It’s hard not to when they're rising across the curve in both the US and abroad. Cyclical and value-oriented assets have increased in tandem, as energy and financials have become leadership groups.

We continue to see countries with heavy exposure to financials emerging from multi-decade bases. Just last month, the Euro Stoxx 600 made new all-time closing highs, while Italian equities reached their highest levels in 13 years.

But when we look further out on the curve, the long end hasn’t been keeping pace with shorter duration yields in recent weeks. 

Taking a look at the 30-year beside the 10- and 5-year yields tells this story best.

As the 5- and 10-year continue to make higher highs and...

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley  

Long-term interest rates have taken a hit this week, while the short end of the curve has continued higher. When we zoom out a bit, yields have been rising across the curve since this summer.

During the past few months, the 2-year yield has ticked higher by more than 30 basis points (bps), the 5-year has increased by almost 60 bps, and the 10-year has gained 40 bps. But when we look all the way out to the 30-year, it's only risen by roughly 20 basis points.

Rates are rallying across the board, Treasuries are trending lower, and bond market investors are favoring TIPS and higher-yielding securities.

How do we want to position ourselves in this kind of environment?

Well, we definitely don’t want to be buying Treasury bonds.

In today’s post, we’re going to take a trip around the fixed-income market and discuss some US Treasury funds we can use as vehicles to express our thesis.

Let’s...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

It’s no secret. 

As investors, we've been rewarded for buying stocks and commodities over bonds for more than a year now. And this will most likely remain the case, as more evidence suggests we’re in an environment that favors risk assets.

The copper/gold ratio hitting new seven-year highs, AUD/JPY testing its year-to-date highs, and cyclical stocks assuming leadership all point to an increasingly risk-on tone.

But for some of us, it’s not as simple as selling bonds and walking away. In some scenarios, we must have exposure to the bond market.

If that’s the case, we want to focus on the riskier areas of the market, just like we’re doing with other asset classes.

Let’s look at a few charts that direct our attention to the strongest areas of the bond market.

First, we have a chart of Inflation-Protected Securities...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

We’re beginning to see signs that risk-on behavior is re-entering the market.

Commodities are ripping in the face of a rising dollar.

Cyclical stocks are back in gear as the S&P 500 High Beta ETF $SPHB posts higher highs and higher lows relative to its low-volatility alternative $SPLV.

Meanwhile, classic risk-appetite barometer AUD/JPY sliced through a critical level of former support-turned-resistance earlier this week.

All of these point to an increasing risk-on environment. 

But what does the bond market have to say about investor positioning toward risk?

Let’s look at a couple credit spreads that speak to investors’ willingness to incur risk.

First, we have the Investment Grade Corporate Bond ETF $LQD relative to the US Treasury Bond ETF $IEF:

Investment-grade...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

Back in August, we presented two opposing views of the relationship between stocks and bonds.

The question was, after running into resistance at a key extension level, in which direction would the $SPY/$TLT ratio resolve?

Would stocks break higher relative to bonds, in the direction of the underlying trend?

Or would the ratio roll over in favor of bonds? It would certainly be a logical level for a trend reversal...

Fast forward two months, and we finally have our answer.

Turns out it was the former -- stocks are breaking higher relative to bonds. Here's a look:

An upside resolution indicates stocks have begun to outperform bonds again. Now, bulls just need to see this ratio stick the landing, in which case we’d anticipate a strong leg up from here.

And if we’re in an environment where the intermarket landscape favors stocks over...

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

We’re finally starting to see resolutions in the bond market.

The 30-year yield is back above 2.00%, the 10-year has reclaimed 1.40%, and the 5-year yield has cleared 1.00% for the first time since February 2020.

Now that it appears rates have picked a direction, what are the implications for the other two major asset classes, stocks and commodities?

As we highlighted last week, we want to look at cyclical and value stocks along with economically sensitive commodities, specifically energy and base metals.

And, in case you haven’t heard, higher yields should also put a bid in financials.

Earlier in the month, we pointed out the relationship between the 10yr-3mo spread and Regional Banks $KRE relative to the S&P 500 $SPY.

Today, we want to follow the same train of thought but apply the analysis to Broker-Dealers $IAI.

Here’s the chart of the 10-year 3-month treasury spread...