Update on Bonds: Jan 27, 2015

Our last update [see: Update on Bonds Dec 5, 2014] came on the heels of a strong move higher in interest rates — from 1.68 to 2.40% in 3 weeks time.  We wrote at the time:

Yields on the 10-yr have bounced strongly since it reached our reversal target on Monday [see: CIW Dec 1.]  Today, TNX tested both the 20- and 50-day moving averages and is probably ready for a breather, if not outright reversal.

Dec 5, as it turned out, marked an important top for yields on the 10-yr, which dropped from 2.33 (the white arrow below) to 1.70% by mid-January.

2015-01-27 TNX daily 1600Though yields bounced pretty nicely at that point, they couldn’t push back above the bottom of the (corrective) red channel and have since slumped lower.

We believe yields will drop even further in the next month or so and have set a target of 1.53% by late February.

Taking a look at the big picture, we can see the white .886 and the red 1.618 Fib levels — which are closely aligned — intersect with a falling white channel line around that time.

2015-01-27 TNX wkly CU 1600While the confluence of chart patterns suggests a decent bounce, slumping interest rates and economies around the world could just as well portend a continuation of the falling white channel.

2015-01-27 TNX wkly 1600If Spain and Italy can trade below 1.5%, why not the US?  From Bloomberg:

Screen Shot 2015-01-27 at 5.31.54 PMOne last thought…while yields and SPX were moving opposite one another earlier in the year, they snapped back in sync between mid-November and year’s-end.  Since then, they’ve diverged again — with yields trending much lower while stocks managed a volatile holding pattern.

But, the divergence is actually much, much greater than that.  As we’ve pointed out many times, big declines in interest rates have been highly correlated with big declines in stocks over the past 10 years.

2015-01-27 TNX vs SPX wklyThe last four declines in TNX are highlighted above.  Note the percentage decline in SPX during each period: -52%, -15%, -20% and -10%.

The decline which began in January 2014 has lasted longer than any since the financial crisis.  And, it’s about the same degree as the average of the past three.

Yet, it’s the only one accompanied by an increase in SPX — a whopping 14% increase, at that.  It does make one wonder what would happen to stocks if central banks ever stopped propping them up.


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