The excessive increase of anything causes a reaction in the opposite direction.
Let's talk facts, folks. First, inflation expectations have undeniably fallen all year, while the honey badger SPDR S&P 500 ETF Trust
(NYSEARCA:SPY) has rallied in an abnormal way, given that equity is not
supposed to be a deflation hedge. Second, the Fed is clearly going to have a hard time “tapering” because the threat of tapering causes bond investors to panic, yields to spike, and “tighter financial conditions” which in turn results in no taper. Third, the yield curve is historically steep relative to its own history and relative to inflation/growth expectations. Stocks and bonds have both priced in something that never occurred, as $85 billion per month fails to force reflation in anything except hope.
The 10-year yields briefly cracked 3% a few weeks ago after stock market hours, getting it “out of the way” before dropping fairly quickly since. Is the bond move over, though? I addressed this issue yesterday when I co-hosted Bloomberg
from the standpoint of arguing that the yield curve looks ready to narrow again.
Take a look below at the price ratio of the iShares Treasury Bond 20+ Year ETF
(NYSEARCA:TLT) relative to the iShares Treasury 7-10 Year ETF
(NYSEARCA:IEF). As a reminder, a rising price ratio means the numerator/TLT is outperforming (up more/down less) the denominator/IEF.
This is one way of watching the yield curve. When it is rising, longer-duration bonds are outperforming shorter-duration bonds, signaling deflationary fears and a narrowing of growth expectations. Traditional risk-off periods coincide with a narrowing yield curve, which appears to be likely, based on the far right side of the chart. Taper talk caused a severe overreaction in yields, which scared the Fed. It now appears that the market wants to reverse some of that. For those looking to play bonds for a trade, this now appears to be an interesting spot to position in.
No positions in stocks mentioned.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.