Saturday, September 11, 2010

The Bond Market as Seen through Stocks

There has been a lot of debate about whether US Treasury Bond yields have bottomed and are ready to rise. I do not claim to be an expert in this field so I cannot talk about the dynamics of increased issuance weighed against the increased demand due to heightened world wide sovereign risks. I will not discuss how front loading the debt issuance will create a much bigger problem down the road when rates start to rise, and should be putting upward pressure on yields. There are others like @Prof_pinch and @bondscoop much better equipped to deal in that space. But I do see something interesting when I look at the trio of Bond ETF's, TLT, iShares Barclays 20+Year Treasury Bond Fund (Treasuries) , LQD, iShares iBOXX Investment grade Corporate Bond Fund (Corporates), and JNK, SPDR Lehman High Yield Bond (Junk). The three charts are below:

TLT, iShares Barclays 20+Year Treasury Bond Fund

LQD, iShares iBOXX Investment Grade Corporate Bond Fund

JNK, SPDR Lehman High Yield Bond Fund

It is clear from these 3 charts that the TLT (Treasuries) led all bond ETF's higher and was the first to crack and start to fall. What is interesting is that it quickly pulled down the LQD (Corporates) but that JNK (Junk) has continued to stay at highs. Now TLT and LQD are sitting at support areas and the debate continues as to whether a bounce will happen or they will lose support and continue lower. The large issuance of corporate debt this week would suggest that the market expectation is for a fall. I suggest that one look to the JNK ETF for the answer. As long as JNK is continuing to hold up, it signals that traders and investors are comfortable with the risk in the US market place and they are continuing to reach for yield. If the JNK starts to fall, it could signal that traders and investors are bailing on the recovery and that sentiment might be changing to where the US is not seen as being safer than other parts of the world economically. At that point all three may continue to fall.

By the way, from the technicals, the TLT and LQD are exhibiting some pretty weak momentum indicators in the MACD and RSI right now although they are at price support. Also the dragonfly doji on the JNK Friday is a very bearish candlestick, despite being at new highs.

Watch the price action and trade'm well!


  1. Interesting analysis. A break in JNK may also indicate a significant portfolio reallocation and move higher in stocks outside the trading range we've been in.

  2. You may want to add PFF to the three charts, it is also holding up so far.