There are some interesting developments in interest rate markets this week. And you can trace it back to commodity prices. Remember how we got here. Sky-high inflation drove a behind-the-curve fed to finally get its act together and start raising interest rates. As they are wont to do, the financial markets quickly priced-in a half dozen rate hikes, betting the Fed Funds rate (which now stands at 1.63%) would top out near 3.33% by the end of the year.
You can see how higher rates got discounted by looking at bond yields across the curve 6-month vs. 2-year vs. 10-year, etc.).
And since bond yields and bond prices move in opposite directions, we’ve seen bonds get torched. The decline has been historic. Indeed, according to Jason Zweig, “It’s the Worst Bond Market Since 1842.”
Year-to-date, the iShares 20-year Treasury Bond ETF (TLT) is down 19.5%
But it’s not just bonds that have suffered. Stocks have slumped as well, bringing untold pain to diversified investors banking on stocks and bonds to be uncorrelated. If being down around 20% for 2022 sounds familiar, it’s because it is.
Year-to-date, the S&P 500 ETF (SPY) is down 20.1%.
While stocks haven’t perfectly mirrored bonds on a daily basis, they’ve tracked each other extremely closely. Should that continue (and I think it will), then what helps one should help the other.
And if you haven’t noticed, bond prices have turned up.
Bonds on the Move
TLT is up 8% off the lows and has turned its daily trend higher. We now have a higher pivot low and higher pivot high. With Tuesday’s close of $116.73, prices have officially closed above the 50-day moving average for the first time in 2022. That’s a bullish change in character. While prices don’t have to scream higher from here, simply stagnating would be a welcome change of pace.
Another way to articulate the bond bottom is to highlight the top in yields. TNX is the ticker for the 10-year Treasury Index. It tracks 10-year yields but you need to move the decimal one digit to the left to get the true yield. Thus, 28.2 is really 2.82%. The bond price bottom has been mirrored by a top in yields. All told, we’ve declined from 3.48% to 2.82%, forming a lower pivot high and breaking the 50-day along the way.
In the short run, we are oversold, so a bounce wouldn’t be surprising. Nonetheless, bears now have a foothold in yields for the first time in a long time. This is a good thing.
The Commodity Unwind
Bond yields aren’t falling in a vacuum. It’s a move born of falling commodity prices. Over the last month, we’ve seen dramatic declines in everything from cotton, wheat, and corn, to nickel, copper, silver, and gold. Even crude oil has reversed course, falling from $123 to $97 in short order.
Wheat was up 80% for the year. Now it’s only up 4.5%. Corn was up 38%, now it’s down 3%. Copper was up 11%, now it’s down 24%. The commodity crash suggests inflationary pressures are easing. That, in turn, is taking the wind out of bond yields’ sails.
These intermarket signals are positive for stocks if you believe it will allow the Fed to be less aggressive with future rate hikes.
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