The current market environment is creating a unique opportunity for bonds.
With the charts signaling strong potential for gains into year-end, now is the moment to take action and add some bond exposure to your portfolio.
With some big reversals underway, the timing couldn’t be better to capitalize on these new trends.
Not only are we seeing a growing list of base breakouts for treasuries, corporate bonds, and bond ETFs, but the intermarket landscape is turning increasingly favorable for fixed income in general.
Let’s jump in and discuss why we’re buying bonds here and how we want to express this thesis.
The fed is giving us a clear indication these days that we’ve seen the peak in interest rates for now. The odds of a rate cut at the September meeting in a few weeks are at 67.5%.
The increasing stress on credit markets culminated in the High-Yield $HYG versus US Treasuries $IEI ratio blowing out to its lowest 14-day RSI reading since September 2008:
US Treasuries are sticking a bullish reversal – an admirable feat following an unforgettable selloff.
If you aren’t buying bonds yet, it’s time to reconsider.
Here's the US T-Bond ETF $TLT trading above a rising 200-day moving average as it violates a multi-year downtrend line:
These are the early signs of a trend reversal.
Now, bond bulls want to witness the 14-week RSI post fresh multi-year highs. (We may see such a print following today’s action.)
Heading into the close, the 30-year T-bond is registering its largest one-week rate of change since spring 2020. And on a more tactical time frame, the 14-day RSI is reaching overbought conditions.
You may not like it. I know I certainly don't. But that's the world we've always lived in. And it's the world I would expect us to be in for a long long time.
The bond market is $130 Trillion. That's compared to a mere $50 Trillion US Stock Market. The total Global stock market is slightly over $100 Trillion, for perspective.
Yields on sovereign debt are chopping sideways across the globe.
The US, France, Germany, Spain, and UK benchmark rates are well below their respective 2023 peaks.
But in Japan, the JGB 10-year yield is hitting its highest level in over a decade.
Check out the Japan benchmark rate cruising above 100 basis points:
Earlier in the week, the Japan 10-year yield reached 1.10 for the first time since July 2011.
While the Bank of Canada, the Swiss National Bank, and the European Central Bank began cutting rates this year, the Bank of Japan (BoJ) may hike later this month.
You can blame it on a plummeting yen or the BoJ’s Yield Curve Control policies.
We have another bearish divergence calling strike three on the stock market rally…
High-yield bonds $HYG versus US Treasuries $IEI.
Check out the HYG/IEI ratio (dark blue line) overlaid with the S&P 500 ETF $SPY:
We use the HY bond-to-US Treasury ratio to track credit spreads. When the dark blue line falls, credit spreads widen – a sign of dwindling liquidity and stress for the bond market (the world’s largest market).
Stocks tend to struggle as credit spreads widen.
On the flip side, when these spreads contract (or the HYG/IEI ratio catches higher) stocks rally as capital flows into risk assets. That’s why these two lines trend together.
Notice the HYG/IEI ratio and SPY bottomed last October before rallying into the spring, following a similar path to new highs.