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Bond Market Poised for Correction: Prices Down, Rates Up

The price of bonds is typically inversely correlated to interest rates (i.e. prices up=rates down & vice versa), with the one exception being high-yield, aka junk bonds, which tend to trade more in-line with equities as they are much more impacted by the economic cycle than fluctuations in rates. With that being said, it appears to me that all major classes of fixed income; treasuries, municipal bonds, investments grade corporates as well as high-yield (below investment grade) corporate bonds are all poised for a correction in the very near future as per the commentary on the charts below:


I have to say that my expectation for a correction in bonds (i.e.- prices down/rates up), especially if that pans out with treasury bonds, contradicts with my expectation for a continued selloff in equities, as typically, when stocks sell-off, treasury bond prices tend to rise (with yields falling) as we get a flight-to-safety rush into those safe-haven instruments. Occasional disconnects of the typical correlations between various assets classes do occur from time to time and I will continue to monitor the charts of all financial assets as well as global currencies closely in order to best align my analysis with the overall bigger picture of what these CB distorted financial markets are trying to tell us. As of now, it appears that both stocks, bonds & quite possibly even precious metals & the mining stocks appear to be headed lower in the comings weeks to months.

Jun 17, 2016 12:36pm|Categories: Equity Market Analysis, Fixed Income (Bonds)|Tags: , , , |7 Comments

7 Comments

  1. Profile gravatar of Eric K
    Eric K June 17, 2016 12:39 pm at 12:39 pm

    So is this “Flight to mattress”? People pulling their money to cash?

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    • Profile gravatar of rsotc
      rsotc June 17, 2016 12:47 pm at 12:47 pm

      Funny Eric, I was going to mention that. Other than select commodities, if money comes out stock, bonds & precious metals, cash is about the only place for it to go. One other possible option (assuming that my call for a pullback in bonds even pans out) would be that move down is driven more by a lack of buyers than an overwhelming abundance of sellers. Supply & demand is essentially what causes asset prices to rise & fall: More buyers than sellers = prices up & vice versa.

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  2. Profile gravatar of dan123
    dan123 June 17, 2016 1:43 pm at 1:43 pm

    Thanks Randy, good stuff, i had TBT on my watch list for while now and it looks like we reached a potential bottom

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  3. Profile gravatar of snp
    snp June 17, 2016 2:27 pm at 2:27 pm

    bondxit

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    • Profile gravatar of rsotc
      rsotc June 17, 2016 2:39 pm at 2:39 pm

      Maybe in conjunction with an $SPeXit?

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  4. Profile gravatar of joefriday
    joefriday June 18, 2016 8:22 am at 8:22 am

    Randy..good post. My thoughts are that Gold and Bonds have spiked on Brexit fears..and the GBP has dropped because of it. I doubt Brexit will pass when it come to people finally pulling the actual voting lever. If I am correct, then a failure will send Bonds and Gold down hard. As a result, I am currently short gold, gdx, bonds and long the GBP. Stops in place of course in case I am wrong. Also, a failure of Brexit imho will likely spike US equity markets higher..but only for a short period. My 2cents.. Good luck everyone and Happy father’s day too!

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    • Profile gravatar of rsotc
      rsotc June 20, 2016 9:11 am at 9:11 am

      G-luck on those trades @joefriday . I’d have to agree with most of what you just said as that what appears to be reflected in the charts (gold down, bonds down), which are essentially the sum of all known & expected variables although despite today’s pending gap higher, it would appear that any rally in US equities will be limited with more downside in the coming weeks to months. I do have to say that an “all asset class” sell-off would be rare so I might end up being wrong on one or even two, but unlikely all three, of those calls (stocks, bonds, & gold all down). Hope you had a happy Father’s Day as well, thanks!

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