From the Desk of Ian Culley @IanCulley

It’s beginning to feel an awful lot like 2022.

Rates and the dollar are on pause, bonds can’t stop falling, and the major equity indexes are violating critical support levels.

But the 2s10s spread raised serious questions this week as it hit fresh 52-week highs. 

So, is the market environment changing?

Let’s find out…

Check out the 2s10s spread challenging zero from below:

An inverted yield curve (widely measured by the 2s10s and 3mo.-10yr. spreads) has cast a pall over capital markets, promising an economic recession for over a year. Yet the US economy remains strong.

From the Desk of Ian Culley @IanCulley

Investors navigate a market of stocks, not a “stock market.”

Equity indexes slide, and US treasuries collapse against a rapid rise in interest rates. Unfortunately for the bulls, the charts show no signs of an imminent change in these underlying trends. 

That’s the environment, and there’s no use fighting it.

Have no fear: We can still lean into market areas that enjoy a rising rate environment, mainly energy.

Here’s the US 30-year yield breaking to its highest level since the summer of ‘07:

Rising rates are the market’s golden thread.

Owning the stock market averages will prove difficult as long as yields press higher.

From the Desk of Ian Culley @IanCulley

Borrowing costs are increasing, and US Treasuries are tanking – again. 

Everyone knows it. Even my therapist commented on interest rates and the “terrible” economy.

The 30-year T-bond has hit our initial target. And the 10-year is within striking distance. 

So much for limited downside risk for the bond market. Perhaps the call for a 5.25 print on the 10-year yield by Christmas wasn’t aggressive at all.

But elevated yields aren’t the problem…

And I don’t care about the economy when it comes to market speculation.

Remember, we don’t trade the economy. We trade the markets or – more precisely – price.

Interest rates hung around decade highs earlier this year while the Nasdaq 100 enjoyed its best first half since its inception.

From the Desk of Ian Culley @IanCulley

Stocks and bonds look vulnerable right now. 

US T-bonds are sliding to fresh decade lows. The S&P 500 completed a three-month top last week.  And the Nasdaq 100 is on the verge of doing the same. 

Those summer highs are receding into the collective memory bank, replaced by new lows and growing unease. Sellers are out in full force.

But instead of allowing the near-term selling pressure and overall choppy conditions to throw us off balance, let’s focus on the one underlying trend tying this market together…

Rising interest rates!

Check out the commodity-bond ratio overlaid with US 30-year yield $TYX:

From the Desk of Ian Culley @IanCulley

Searching for trending markets?

Look no further than US treasury bonds!

Bonds across the curve are skidding to fresh contract lows as interest rates have a one-track mind…

Higher!

Check out the US 10-year yield posting fresh sixteen-year highs:

Not to be outdone, the 2-year yield just registered its highest level in seventeen years.

Interest rates across the curve are breaking to decade-plus highs in what has become a foot race.

It’s clear that the rising rate environment remains alive and well. An inverted yield curve keeps score, reminding us that shorter-duration yields are winning. 

But I honestly don’t care what area of the curve is leading. 

From the Desk of Ian Culley @IanCulley

Markets fluctuate to a relentless beat driven by fear, greed, and an incessant newsfeed.

Sometimes, they trend. 

But, more often than not, they churn sideways.

Unsurprisingly, “sideways” best describes most markets today.

The S&P 500, the Nasdaq 100, and the Dow Jones Industrial Average have gone nowhere in three months. 

Regardless, one uptrend remains intact…

The coordinated rise in the US dollar and interest rates.

Check out the overlay chart of the 10-year US Treasury yield $TNX and the US Dollar Index $DXY with a 21-day rolling correlation in the lower pane:

US yields and the dollar have been in near-perfect harmony since the Fed began raising interest rates last year.

Sure, they briefly fell out of step. But the two found their groove in early July.

From the Desk of Ian Culley @IanCulley

Yields are rising worldwide. 

US treasuries continue to fall after a brief pullback in price. 

Now, Chinese government bonds are pressing toward fresh lows.

Sovereign debt epitomizes downside risk. And Chinese bonds are on the cusp of a significant breakdown – a breakdown that spells more trouble for global bond investors.

Check out the VanEck China Bond ETF $CBON:

CBON aims to track the ChinaBond China High Quality Index (debt mainly issued by the People’s Bank of China). And like US treasuries, Chinese government bonds are flirting with fresh multi-year lows.

From the Desk of Ian Culley @IanCulley

US Treasuries have stopped falling – for the moment.

But it’s a mixed bag.

Short setups for long-duration bonds remain in play despite pullbacks underway, while the shorter end of the curve never managed to break down.

It’s messy.

So, let’s run through the US Treasury futures for an updated read on the bond market.

First up is the 30-year T-bond:

The 30-year has broken below a shelf of former lows at approximately 123. It’s a short as long as it’s below that level with a measured target of 113’15.

But the 30-year is finding support at last year’s lows, bouncing higher toward our line in the sand.

From the Desk of Ian Culley @IanCulley

I bought bonds last December and again in March.

I thought it was time to bring these beaten-down assets back into the fold as US Treasuries printed fresh six-month highs.

But I was wrong. 

Fast-forward to today, and the downtrend for bonds remains intact.

And those false breakouts last spring have led to fresh breakdowns as we head into the fall.

The 10- and 30-year futures are flashing sell signals as they undercut their respective March pivot lows.

Now, the shorter end of the curve is doing the same.

Here’s the two-year Treasury note completing a bearish continuation pattern:

From the Desk of Ian Culley @IanCulley

Credit spreads are the canaries in the financial market coal mine.

They’ll peep at the first sign markets face serious risks.

With stocks entering a corrective phase, it makes sense to seek information from the biggest exchange in the world.

The bond market.

Credit spreads remain tight despite increased selling across US equities.

That’s the opposite of what I’d expect during a severe selloff.

What does that tell us?

Check out the overlay chart of the Russell 2000 ETF $IWM with the high-yield credit spread ratio, $HYG/$IEI:

From the Desk of Ian Culley @IanCulley

Are investors really buying bonds, betting on a squeeze higher?

Perhaps it’s just my Twitter feed. (Or are we calling it "X" now?)

I’m perplexed by the growing chatter around picking the bottom in bonds.

Warning: Picking bottoms is never a good look.

It’s unbecoming, especially when there are zero signs of a reversal. (The same applies to tops.)

I understand the Nasdaq 100 had its best first half – like, ever.

But what does that have to do with yield charts?

Rates continue to rise worldwide.

Here’s a look at Germany, France, Portugal, and US benchmark rates:

All are steadily grinding higher following explosive advances last year. Yet none have decisively resolved to the upside from their respective multi-month ranges. 

From the Desk of Ian Culley @IanCulley

Rates are on the move again.

The US 30-year Treasury yield $TYX cleared numerous hurdles this week. 

It broke above a shelf of former highs, climbing to its highest level year-to-date. And, perhaps more importantly, it reclaimed its former 2014 high.

Add a potential failed breakdown in the US dollar index $DXY, and it’s starting to feel a lot like 2022.

But should we expect another bloodbath?

…Not necessarily.

Here’s a quick look at the US 30-year yield resolving higher from an 8-month consolidation: