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The Lead-Lag Report: Are Bond Markets on the Verge of a Meaningful Break?

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We're at a key juncture, and the bias toward reflation remains. However, vigilance will be key in the coming weeks.

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We choose what attitudes we have right now. And it's a continuing choice.
-- 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.



LAGGARDS: TECHNOLOGY HEMORRHAGES

Technology (NYSEARCA:XLK) – Support (Again and Again)



Comments: Technology is nearing another relative support level again after getting wrecked in the latter half of 2012. Weakness has been stunning since the late-August peak, and may be due for a period of outperformance upon confirmation. For a quick trade, technology is one to keep an eye on.

Utilities (NYSEARCA:XLU) – Breakdown Continues



Comments: Weakness in utilities continues on the heels of the fiscal cliff deal and overall risk-rotation taking place. Money continues to favor more cyclical areas of the stock market, which is a healthy sign for the continued uptrend in equities. If 2012 was the year of yield, 2013 likely becomes the year of appreciation.

Emerging Markets (NYSEARCA:EEM) – Time to Lag?


Comments: Emerging markets have performed quite strongly since September, holding up well as money favored overseas investments in the latter half of 2012. The ratio spiked to a resistance level and has since turned down a bit. A breakdown in the ratio appears to have occurred as money has rushed into overseas investments. I do not believe a big downtrend is likely, but rather that the US could simply stage a relative catch-up in strength.

Conclusion

Intermarket trends for the most part remain positive as our ATAC models used for managing our mutual fund and separate accounts stay in equities. The bond market appears to be at an important juncture, where either the yield curve begins to legitimately steepen, or credit spreads begin to falter after extreme narrowing. Which will take place is a function of the whims of the crowd, but the bias remains for reflation rather than another near-term deflationary scare.

Editor's note: This update is published every week exclusively for Minyanville, and is compiled by Michael A. Gayed, CFA, Chief Investment Strategist of Pension Partners, LLC.

Twitter: @pensionpartners
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.

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