If you can pry your eyes from the UK gilt and Credit Suisse articles, you’ll find it’s not all doom and gloom across the bond market – especially high-yield debt in the US.
A quick warning before we continue: You probably won’t see a similar message on the financial news. It’s just too optimistic for the current environment. It wouldn't get enough clicks.
But facts are facts. And right now, high-yield bonds are hooking higher, while stocks are also rising.
Check out the dual-pane chart of the Fallen Angel High-Yield Bond ETF $ANGL and the S&P 500 $SPX:
High-yield debt hasn’t blown out relative to Treasuries. Regardless, the largest markets in the world are buckling under pressure.
You have to look outside the US and beyond high-yield corporate bonds to see the stress. Here are three cautionary data points to consider: European sovereign spreads, US bond market volatility, and the steep decline in investment-grade bonds.
When you weigh the evidence, it’s clear risks are rising for US markets.
Let’s look at the charts!
First, here's a look at European sovereign spreads:
With Bonds getting destroyed this year, it's put pressure on growth stocks, because of their long-duration characteristics.
As rates rise, it puts a lot of pressure on growth stocks. That's why historically the more Value oriented stocks and sectors tend to outperform when rates are rising.
When rates are falling that's when growth stocks usually thrive the most.
We all know this. The data is free.
BUT, a funny thing has happened over the last few months.
With bonds continuing to collapse and breaking those summer lows, the Nasdaq has been outperforming the S&P500.
Interest rates have resumed their ascent following a brief summer pause. And, in recent weeks, their climb has accelerated.
Aside from lower bond prices, what do higher rates mean for other assets, such as stocks and commodities?
It might seem like a simple question. But its relevance is undeniable given the current market conditions.
We’ve been vocal about the cyclical areas of the market that benefit most from a rising rate environment – think commodities, energy, materials, and banks. We’ve put out plenty of trade ideas in those areas.
After Federal Reserve Chair Jerome Powell’s remarks this morning, the market is pricing in an 86% chance of a 75-basis-point hike later this month.
Meanwhile, rates continue to accelerate at the short end of the curve. That’s been the story for months now.
But will the middle and long end of the curve head higher as well?
According to the two-year US Treasury yield, the answer is a resounding "yes!"
Short-duration rates offer plenty of valuable, leading information regarding US Treasury yields.
We’ve leaned on the five-year yield throughout the current cycle as an early indication of the direction of the 10- and 30-year. It’s proved a beneficial practice.
Today, we’re going to drop it down a notch, extending the same logic to the two-year yield.
Here’s a quad-pane chart of the two-, five-, 10-, and 30-year US Treasury yields:
