Update on Bonds: Aug 3, 2015

The 10-yr note yield tagged our downside target today.

2015-08-03 TNX daily 0935Note the slight overshoot in the purple channel top’s backtest came very close to the .886 Fib (21.41 vs 21.37) while tagging the bottom of the rising white channel.  This is very important support for notes.

A breakdown from these levels would be quite significant. Though, as we’ve noted many times in the past year, the Fed has successfully broken (or, at least, suspended) the link between lower interest rates and falling stock prices.

2015-08-03 TNX wkly CU 0935As the long-term chart shows, it was a very well-established correlation.

2015-08-03 TNX wkly 0935As well-established as are the upper and lower bounds of the white channel, the midline has been used and abused many times.  Escapades above it have frequently been used to lever stock prices higher.  The fundamental argument is that improved economic activity should be reflected by higher inflation and higher interest rates.

In 2014, we saw this relationship break down in favor of a stronger correlation between lower rates and higher stock prices — thanks, in large part, to the Fed keeping interest rates artificially low.

Since lower rates delivered higher stock prices, will higher rates help deflate stocks?  Not if the Fed can help it.

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