Bonds are bouncing off key levels of potential support.
For some, it’s a former low. And for others, it’s a downside extension level. Regardless, we can all rejoice that bonds have stopped falling.
That doesn’t mean we’re rushing out to buy Treasuries. Instead, it signals a constructive start to a potential bottoming process for the bond market and relief from downside volatility.
Let’s check out the charts!
First up is the long-duration Zero Coupon ETF $ZROZ:
ZROZ has rebounded above its former 2014 lows, posting a potential failed breakdown. Risks are to the upside above 82 with potential resistance at the shelf of former lows around 100.
It’s a similar story for the Treasury Bond ETF $TLT:
Don’t take your eyes off the US dollar and interest rates!
I know it’s been a long year, but we’re finally witnessing early signs of potential trend reversals. The breakdown in the dollar last week confirmed the mounting evidence suggesting the USD has reached its peak.
Now, will interest rates follow?
Check out the dual pane chart of the US dollar index $DXY and the 30-year yield $TYX:
They look almost identical. The recent breakdown in the dollar marks the lone flaw between the two, raising the question…
Will the strong relationship between rates and the dollar hold?
The stocks and commodities that tend to accompany rising yields haven’t kept pace since early spring. Rates across the curve have accelerated higher, leaving these risk assets in the dust.
But the seasons have changed – and the dust has settled.
Cyclical value sectors have found their footing in recent months. Now, they’re playing catch-up.
One of the strongest market themes in recent weeks has been the reemergence of value over growth.
Check out the overlay chart of the 10-year US Treasury yield $TNX and small-cap value $IWN versus small-cap growth $IWO:
Everyone knows fixed income is having one of its worst years on record. And, from the looks of it, we’ll all be dragging our Christmas trees to the curb before US Treasuries stage a miraculous comeback.
Don’t get me wrong. I believe these safe haven assets will dig in and catch higher – eventually. There’s just no sign of it happening any time soon.
Instead of focusing on the disappointing performance of bonds, let’s turn our attention to its relative trends against other major asset classes – stocks and commodities.
Here’s the commodities versus bonds ratio using the CRB Commodity Index and the 30-year Treasury bond futures:
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:
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.