After last December’s interest rate hike by the U.S. Fed, we have seen a clear uptrend in the U.S. bond market. That is counterintuitive, as higher bond prices are the result of lower yields.
Today, again, we saw a rise in bonds, after the speech by Mrs. Yellen. Apart from the ‘news’ that interest rates would remain unchanged, there were some interesting conclusion and quotes. Take a look at these ones:
- FED REPEATS ECONOMY EXPECTED TO WARRANT ONLY GRADUAL RATE RISES
- FED ASSESSING GLOBAL DEVELOPMENTS FOR ITS BALANCE-OF-RISK VIEW
- FED ‘CLOSELY MONITORING’ GLOBAL ECONOMIC, FINANCIAL DEVELOPMENTS
- FED REMOVES ‘REASONABLY CONFIDENT’ REFERENCE TO 2% MEDIUM-TERM INFLATION LEVEL
- ECONOMIC GROWTH ‘SLOWED LATE LAST YEAR’
Well, what should investors think when hearing all this? Maybe the are strengthening their ‘risk off’ stance? They probably are, and even to an extent that it shrugs off further interest rate hike expectations.
That is clearly not very bullish for stock markets. We would say that, given the position of all Treasuries, the bond market as a whole is at a critical juncture. As seen on the next set of charts, we have annotated the trendline per Treasury in purple. Especially the 30 Yr and 10 Yr Notes are testing their 2015 trendline.
The reason why this juncture in the bond market is so important is that it coincides with a make-or-break level in stocks. As seen on the chart of the S&P 500, stocks are close to a breakdown, while bonds (above) are close to a breakout.
Do not ignore this message, we aren’t ignoring it neither, and it could even make us conclude that our bullish stock market forecast could be invalidated. We have said that bonds should ease and crude should be bid, in order to keep stocks alive. So far, we have seen a revival in crude, but bonds are being bid strongly.
The was really a good reason why we said that this is the most important week of the year.