Rates are at multi-year highs and bond prices are at multi-year lows. This has been the trend. We’ve been in the camp that rates would break out above 3% and that 4% was next. This has been logical target for a variety of reasons, but today that is not necessarily the point. I just don’t think it will be quite so simple for rates to continue higher, and a break back below 3% would make rates incredibly vulnerable to fall quickly.
This chart shows two intermarket correlations that tend to move up and down with interest rates, particularly the U.S. 10-year yield. When the market believes rates are going higher, you see money flow into Regional Bank stocks at a faster pace than it flows into higher yielding stocks, like REITs, for example. When markets believe rates are going lower, you’ll see the opposite, money flowing into higher yielding stocks, in a search for yield that they’re not getting in bonds, faster than into Regional Banks stocks. That’s why the $KRE / $IYR and $KRE / $XLU ratios look exactly like the 10-year:
Click on chart to zoom in
In the middle, you’ll see the Copper/Gold ratio that also tends to move in sync with interest rates. The thing is that with this break out in 10s above 3%, you’re not seeing confirmation in either the stock market or commodities market. Notice how with higher highs in rates, we’ve got lower highs in both the Regional Banks/REITs ratio and the Copper/Gold.
Something is off here. So when we look at Commercial Hedgers and what they’re doing in Bonds, we see that they currently have on the most bullish net long position in history. Do you think they’re buying so many bond futures because they think prices are going lower?