Market Overview

Wednesday's Market Minute: The New Trend In Bonds Will Be An Agonizing One

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Wednesday's Market Minute: The New Trend In Bonds Will Be An Agonizing One

If it wasn’t clear enough already, bonds aren’t going to save investors from a troubled stock market. Since the Nasdaq’s September high, the iShares 20 Plus Year Treasury Bond ETF (NASDAQ: TLT) is 6% lower. In fact, few likely appreciate the degree to which we are back in unchartered territory when it comes to the stock market’s relationship with Treasuries.

When the Nasdaq dropped 10% in September, the bond market sold off, too. It wasn’t much, but I ran the numbers: there have been 52 instances of a 10% or more drop within a four-day span (technically ours was three due to Labor Day, but a sell-off that fast is so rare that I went for a larger sample size).

Bonds rallied 70% of the time for a median drop in the 10-year yield of 2 basis points. In our case, the yield climbed about 5 bps, more than any other instance apart from the snap-back bond sell-off on March 18 this year, and similar periods of volatility in the great financial crisis and the recession of 1990. Bottom line: we’re not in good company, and there’s no compelling reason to think the relationship is going to change anytime soon.

The 10-year yield bottomed on August 3rd – long before any presumption of a political Blue Wave, and around the time vaccine headlines were more about delays than efficacy. The fiscal rumor mill is equally inadequate in explaining the timing. The best explanation is simply a momentum trade that faded when it was clear the Fed was going on hold and that the recovery was steady, even without stimulus.

On Feb 21 this year, I warned readers of this newsletter that the unprecedented concurrent rally in bonds and stocks would end in a blowup. This time around does not look as dramatic, but the grind higher in yields is already proving difficult for expensive growth stocks to handle. What we see the makings of so far is less explosive crash, more tapeworm-style erosion: slow, steady and agonizing.

Photo by Sophie Backes on Unsplash

 

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