From the Desk of Ian Culley @IanCulley
“You can’t pay me enough to buy US Treasuries.”
That’s the message from the bond market.
The result: a persistent rise in interest rates.
Classic intermarket ratios – copper versus gold, regional banks $KRE versus REITs $IYR, and the Russell 2000 $IWM versus the S&P 500 $SPY – all point to lower yields.
This has been going on for months. Some may argue that these ratios are broken or no longer carry significant insight into the direction of rates.
It may be true that the strong relationship between the above ratios and interest rates has indeed decoupled.
But it’s not solely relative trends hinting at declining yields.
The stocks that benefit the most from a rising rate environment also look terrible on absolute terms…
The ProShares Equities for Rising Rates ETF $EQRR tells the story:
Financials, industrials, and energy comprise over 75% of EQRR. These market areas tend to trend higher as rates rise. It’s right there in the name – Equities for Rising Rates!
But that hasn’t been the case.
Instead of catching higher, these cyclical value-oriented stocks are carving out a potential topping formation. Add in the bearish momentum regime, and this is certainly not a chart I want to buy.
To be fair, EQRR has yet to break down.
But it’s not looking good for these stocks considering copper mining bellwether Freeport-McMoRan $FCX is completing a similar bearish formation.
FCX represents the equity market’s equivalent to Dr. Copper.
It doesn’t bode well for the market or the global economy to witness FCX slicing through potential support yesterday while undercutting its pivot high from last August.
Again, not what I would expect in a rising-rate environment – more precisely, a sustainable rising-rate environment.
Call me old school, but the market (like my wife) is never wrong. Acceptance is the key!
Investors don’t want to buy Treasury bonds, and I don’t blame them. Money flows where it’s treated best. That’s not bonds right now.
On the other hand, I can’t ignore the overwhelming intermarket evidence suggesting lower rates.
Perhaps the markets are bifurcated. But that doesn’t negate the underlying truths reflected in price.
Sure, I could throw my hands up and claim the market puzzle pieces are broken. But I’d rather work with what the market offers.
Bonds and stocks will ultimately fall back into a rhythm we all recognize. For now, rates continue to march to the beat of their own drum.
And I’m OK with that.
Countdown to FOMC
The market is on the fence regarding a pause or a 25-bps hike next month.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
Thanks for reading. As always, be sure to download this week’s Bond Report!