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

Benchmark yields have moved in a vertical line higher since the beginning of March. This isn't just the case in the US; we're seeing similar action all across the globe.

But as rates rally higher and higher, more and more classic intermarket relationships are failing to confirm the move.

Yes, commodities and commodity-related stocks remain resilient, and bonds are an absolute dumpster fire.

Most other assets we would expect to do well in a rising rate environment simply aren’t. This is especially true for the banks!

Meanwhile, those groups that we'd expect to underperform in this kind of environment, such as utilities and other defensive stocks, are actually outperforming.

All of this speaks to risk-aversion, not risk-seeking behavior.

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

It finally happened…

The yield curve inverted for a brief moment as the 2-year yield rose above the 10-year earlier this week. 

But whether or not it inverted yet is beside the point. It’s been flattening for a long time, and that’s the direction we’re headed in. It's only a matter of time.

While media outlets and fearmongers will spin this development as an urgent warning of an impending bear market, here's what you need to know: Throughout history, equities have done well during and after inversions.

This commonly observed leading indicator has a tendency to precede major market tops by years, not months. In other words, there's still time. The average lead time is about 18 months after prior inversions. 

More importantly, when it comes to forecasting bear markets and recessions, many experts will argue that it is actually not the 2-year we should be focused on, but the 3-month yield. 

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

It's beginning to feel more and more like a risk-on environment out there.

Commodities are ripping higher. Stocks are digging in at critical levels. And defensive assets such as Treasury bonds and the Japanese yen are in freefall.

Despite the market volatility this year, investors continue to be rewarded for buying stocks over bonds. This has been the case for two years now, and there's no evidence it will change anytime soon.

When we look to our risk indicators and risk appetite ratios, the majority are still stuck in a range. With the stocks versus bonds ratio resolving to fresh highs, we're thinking the rest may soon follow.

But first and foremost, the price action from this classic intermarket relationship suggests that stocks are still the place to be.

Let’s take a look.

Here’s a chart of the S&P 500 $SPY versus US T-Bond ETF $TLT:   

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

Benchmark rates around the world have been rolling over as uncertainty sweeps across markets.

Despite the growing pessimism among investors, global yields are digging in at critical levels and bouncing higher in recent sessions. 

We discussed how international yields – particularly those in developed Europe – confirmed the new highs in US rates earlier in the year. 

Today, we’re going to check in on some of those same yields and see if this is still a piece of confirming evidence for rates here in the US.

With the US 10-year hovering around its breakout level at last year’s highs we’re looking for any clues we can get for whether or not these new highs are here to stay.

If the new highs in global yields are holding, that would go a long way in supporting the upside resolution in the US 10-Year.

On the other hand, if we start to see more and more yields around the world fail and roll over, the US will likely follow.

Let’s start with the US 10-year yield:

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

We could sit back and speculate on what measures the Federal Reserve is likely to take to curb inflation. But it wouldn't change the fact that inflation is already here.

We’d rather focus on what market participants are doing now to position their portfolios for these inflationary pressures.

Since last year, inflation has gripped markets, and we don’t foresee it going away anytime soon. We think the best course of action is to get used to this environment and focus on assets that tend to perform well during periods of inflation.

One of our favorite ways to measure inflation expectations is by analyzing Treasury Inflation-Protected Securities (TIPS) versus Treasuries.

Relative strength from TIPS implies that investors are positioning themselves for a general increase in the prices of goods and services. That’s exactly what we’re seeing today.

Let’s take a look and discuss what we want to do about it.

Here’s an overlay chart of the $TIP/$IEF ratio and the US five-year breakeven inflation rate:

US Treasuries are off to their worst start in more than a decade as rates rise across the curve. 

The US Aggregate Bond ETF $AGG is down more than 4% year to date. Treasuries can’t manage to catch a bid. And High-Yield Bonds $HYG have fallen off a cliff.

But this could all change quickly. Especially if stocks continue to sell off. 

Money has to go somewhere as it flows out of equities. And with many bonds testing critical levels, it would make sense to see prices mean revert, at least in the near term.

Let’s take a trip around the bond market and discuss some of the key levels on our radar.

First up is the long duration Treasury Bond ETF $TLT:

After dropping 5.4% in the last three months, TLT has paused at a logical area of former support around 135. This the same level price rebounded from late 2019 and early 2021.

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

Not all stressors are debilitating.

In some cases, stress can push us to perform at our highest level. But, of course, there are instances when opposing forces become overwhelming, making it near impossible to reach our goals.

We’ve all been there.

And the markets are no different.

While we keep tabs on our heart rate or blood pressure to gauge our stress levels, we focus on credit spreads to measure stress in the market.

Given that rates continue to rise worldwide, it’s an appropriate time to evaluate these spreads and the potential obstacles that may lay ahead for risk assets.

We recently broke down credit spreads in anticipation of them widening and outlined some charts that are driving this trend.

Read our January 27 post for more information about the ins and outs of credit spreads and how we analyze them.

Since these spreads provide valuable information on the health of the overall market, we’re going to check back in and discuss another chart that is on our radar. 

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

The middle of the curve is catching higher as the US 10-year Treasury yield pushes toward its next milestone at 2.00%.

Now that we’re starting to see some follow-through to the upside, it raises the question…

Are these new highs in the 10-year sustainable?

With inflation expectations just off their highs, short-term rates surging in the US, and yields ripping higher across the globe, we think the answer is a resounding yes! 

A few weeks ago, we discussed how global yields -- particularly those in developed Europe -- were confirming the new highs for US yields.

Since then, we've only seen this trend accelerate. With central banks turning increasingly hawkish, rates continue to break out to new highs around the world.

Today, we're going to dive further into this theme by taking a look at a handful of benchmark rates outside the US. 

Let’s dive in!

First up is the German 10-year:

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

The path of least resistance is higher for yields, as the market continues to punish investors for buying bonds. 

As long as that’s the case, we want to look for short opportunities when approaching the bond market.

Since the shorter end of the curve has ripped higher, the moves in these contracts and ETFs are extended. They simply don't offer favorable risk/reward trade setups at current levels.

We’re better off looking for ways to play rising yields further out on the curve in this environment. 

We’re going to discuss how to do just that by covering a few charts that are setting up on the short side.

First up is the 30-year Treasury bond futures:

T-bonds are carving out a multi-year head-and-shoulders top above their pivot lows from last March.

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

The Federal Reserve is doing its best to prepare the market for what is expected to be a year of rate hikes. But investors aren’t exactly enthusiastic about this outlook, as stocks came under further pressure following Wednesday’s Federal Open Market Committee announcement.

The bond market is also offering some valuable information again. And considering the recent volatility, it’s more important than ever to listen closely.

When we think about bonds, credit spreads are always top of mind, as they’re a great barometer of market health. When there's stress on risk assets, it shows up in credit spreads. 

When analyzing credit spreads, all we’re doing is measuring the difference in yield between a Treasury (the safest bet) and a corporate bond (riskier asset) of the same maturity. If these spreads begin to widen, it’s usually problematic for equities.

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

There have been some fireworks to kick off the new year. One of the biggest developments in 2022 has to be the US 10-year yield breaking to its highest level in two years.

The direction in which yields resolve from their 2021 consolidation will impact all the major asset classes, including bonds, stocks, and commodities. We’re already seeing procyclical assets catch an aggressive bid as the 10-year flirts with an upside resolution.

For now, the path of least resistance is higher. But we still need to see follow-through and confirmation before we can be comfortable that these new highs are here to stay.

When we look at the international bond market, it’s not just domestic Treasury yields that are on the rise. We’re actually seeing rates make new highs all across the developed world.

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

Downside pressure on long-duration rates and a flattening yield curve was the story of the bond market for the latter part of 2021. 

But we started to see signs that downside risks were easing in the final weeks of December. The 10- and 30-year yields made a nice kick save after undercutting their summer lows, and high yield bonds $HYG began to outperform safer alternatives like the Treasury bond ETF $IEI.

It seemed like the bond market was heading in the right direction – except for Treasury spreads. The 2s/10s spread was the missing piece of the puzzle, continuing to push toward new 52-week lows… 

Until now!

Only a couple of trading sessions into the new year, the bond market is providing plenty of fireworks. Rates are jumping higher across the curve, and critical treasury spreads such as 2s/10s, are following higher: