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Warning: Corporate Bonds Dictate Rally


Investors should've seen it coming.

Numerous people have asked for an update to As Go Corporate Bonds, So Goes the Market.

Specifically, inquiring minds are interested in my statement "It will pay to keep one eye on the credit markets to help ascertain long-term equity direction. In August of 2007, the corporate-bond market cracked wide open. Although the S&P 500 made a new high in November, the corporate-bond market didn't. It was the mother of all warning calls that most missed."

Here are some charts that show what I mean:

S&P 500 vs. BAA Corporate Bonds vs. 10-Year Treasuries

Click to enlarge

The above chart shows that BAA corporate-bond yields (one step above junk) were rising throughout 2008, and started soaring right before the stock market waterfall plunge. The 2009 rally started in March with the BAA yield dropping and the 10-year treasury yield rising.

A falling BAA 10-year spread is a measure of increased willingness for market participants to take on risk as the following chart shows:

Click to enlarge

The above chart is courtesy of Chris Puplava, and I did the annotations. Rising BAA to 10-year treasury yield spreads starting August 2007 was a big warning sign.

Not many have access to a Bloomberg terminal that produced those charts, but here's something that everyone can easily watch.

HYG -- High Yield Bond Fund vs. S&P 500 SPY

Click to enlarge

Here is a close-up detail for 2009:

Click to enlarge
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No positions in stocks mentioned.
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