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.
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.
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
In April 2020, crude oil traded below zero and marked the perfect capitulation event for a number of trends.
Around the very same time, both commodities and stocks bottomed and kicked off major rallies.
Until recently, commodities had underperformed stocks for about a decade. To make matters worse, they were moving lower on an absolute basis for most of that time as well.
Not only have commodities started to trend higher on an absolute basis again. They're also undergoing a reversal in their relative trend with stocks and other alternatives.
We’ve been clear about our bullish position as we’ve discussed the potential for a new commodity supercycle for over a year.
Now, we want to take that thesis one step further as the evidence is building in favor of commodities experiencing a sustained period of outperformance relative to stocks.
To best take advantage of this trend, we want to be overweight commodities and commodity-related stocks.
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.
