The Lead-Lag Report: Are Bond Markets on the Verge of a Meaningful Break?
We're at a key juncture, and the bias toward reflation remains. However, vigilance will be key in the coming weeks.
-- John C. Maxwell
Below is an assessment of the performance of some of the most important sectors and asset classes relative to each other, with an interpretation of what underlying market dynamics may be signaling about the future direction of risk-taking by investors. The below charts are all price ratios that show the underlying trend of the numerator relative to the denominator. A rising price ratio means the numerator is outperforming (up more/down less) the denominator.
For the full version of the Lead-Lag Report, click here.
LEADERS: BOND MARKET WATCH
Long Bonds (NYSEARCA:TENZ) – Yield Curve Steepening Continues
Comments: The yield curve appears to be in the early stages of steepening as longer-dated Treasuries begin to underperform shorter-duration ones. A steepening yield curve (declining ratio) would be a bullish indicator, suggesting that the reflation trade is accelerating. The ratio is now hitting up against support, and a break below would be important for a continuation of the uptrend in risk assets.
Treasury Inflation Protected Securities (NYSEARCA:IPE) – Steady
Comments: The IPE/TENZ price ratio is one way of seeing if inflation expectations are rising or falling within the bond market. When the ratio is trending higher, it means bets are occurring on rising prices ahead. Note that the ratio is having a hard time breaking past resistance, albeit the uptrend of higher lows remains. This remains an important ratio relationship to watch.
Junk Debt (NYSEARCA:JNK) – Tighter Spreads
Comments: The above ratio is one way of seeing if credit spreads are narrowing (uptrend in the ratio) or widening (downtrend in ratio). The ratio has made new relative highs, and may be in the early stages of a potential bubble. Spreads have narrowed and a downtrend does not have to be bad for markets so long as the speed of a potential turnaround is muted. This also remains an important relationship to watch for signs of cracking in risk-taking.
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