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Bonds Starting to Side With Stocks; Currencies Remain Problematic for Bulls

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Treasury yields are on the rise along with junk bond prices, finally offering some confirmation of the rally in stocks. Weak action in the Aussie and Canadian dollars continues to be an issue for bulls, however.

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Historically, I mean going back years, the relationship between currencies, bonds, stocks and commodities has mattered. In recent market history, however, stocks have been ignoring the action in the bond and currency markets. I have noted in my articles over the last several months that "something has to give." Either stocks would tumble or the action in the bond and currency arenas would start to turn and confirm the positive action in stocks. Finally, I am seeing some evidence of a more bullish tone from bonds – both in Treasuries as well as higher yielding corporate paper. Unfortunately, there is no such uniformity in confirming the bullish equity action from the currency markets. Let's take a look at my findings in more detail.

BONDS

Yields continue to move higher – breaking above short-term resistance in the process.

The yield on the 10-year US Treasury Note (INDEXCBOE:TNX) finally seems to be acting as it should – rising when stocks are on the rise. One month's activity does not a (long-term) trend make, however. So, shy of declaring a new uptrend in Treasury yields, what does my analysis tell us? Based on the chart below, it appears that 10-year yields may be in the early stages of wave "c" of an "abc" correction to the upside. The peak for this correction should come in at around 2.281% (from 1.944% heading into today's trading). Any close above 2.281% would be a very bullish sign for global risk investors as it would mean (in my opinion) a major asset flow OUT of safety and into other assets such as riskier bonds, stocks, commodities and currencies. Until such a breakout close occurs, though, we must operate under the assumption that this is merely a corrective move higher in yields.



High yield debt continues to trade well as money continues to move out on the risk spectrum.

As noted above, money is flowing out of safety and into risk in the short-term. Where is it going? Well, one of the places it seems to be headed is into high yield debt. I have pointed this out previously, but "junk" bonds (shown below via the iShares High Yield Bond ETF (NYSEARCA:JNK)) are in breakout mode. The monthly chart of JNK shows a bullish close above long-term horizontal line resistance last month – with nice follow-through thus far this month. As you'll notice on the left side of the chart, there is still plenty of room for JNK to move before it even tests the pre-crisis highs in the upper $40s. While JNK like stocks will have some pullbacks, when the chart is this bullish, those pullbacks are to be bought.



Emerging markets debt also holding up despite the recent strength in the greenback.

Debt instruments from emerging market countries have been yet another "risk on" instrument in the recent past. However, the action over the last several months has failed to confirm the upside we have seen in other risk assets. The good news for the bulls is that the long-term uptrend in prices for the iShares MSCI Emerging Markets Bond ETF (NYSEARCA:EMB) is still intact. Based on the chart below, as long as the $118 price level holds up as support, EMB is still in good shape long-term. In fact, entering new long trades in EMB seems to be the play as it nears the low-$118s.



European yields painting a better picture.

I will keep this section brief given the depth of the analysis in the rest of today's report. What I can see in Europe is a massive decline in yields / rise in prices for the "riskier" countries (Greece, Spain, Portugal, etc.) and a persistent low level in yields in Germany. That seems very similar to the recent strength in US high yield bonds and the persistent low rates in Treasuries (notwithstanding their recent bounce). What I feel we can conclude here is that systemic risk is being minimized in Europe and catastrophe has been taken off the table by the ECB and the other powers that be over there.
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No positions in stocks mentioned.

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