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!

Q: Is the Bond/Dollar Run Over? A: Maybe

Earlier today there were chilling technical indicators pointing to the end of the US Treasury Bond and US Dollar Index rally. Here is the post as written about 12 noon.



Original Post

It is interesting that more equity traders a now paying attention to the price action in bonds and the dollar. Sentiment traders would think this might suggest a top is near. But part of the attention is due to the rise of ETF's available to trade these markets. In fact these ETF's do a pretty good job of communicating information on the macro markets to equity traders without leaving their space. This is valuable information as to the potential future direction for equities.

I posted these two charts about 10:30 today

iShares Barclays 20+ Year Treasury Bond, TLT


Powershares DB US Dollar Index Bullish, UUP


When I first posted them I noted that it was early in the day but that something interesting was happening. The US Dollar Index and Treasuries have been trading in tandem lately. The TLT is creating a shooting star formation. This is where the price opens on a gap and jumps higher only to fall back. If it closes this way it is very bearish. It's companion lately, UUP, is in the process of printing a bearish engulfing candle. This is also bad news for the pair and confirmation of a potential topping process in Treasuries.

Be watchful as to how these close. Strong Bonds and Dollar have been driving equities lower. Use these new tools. A reversal could change things.

Trade well.


What has happened since then?

The TLT found support and rallied back to near the days high and the UUP also rallied above yesterday's open.

iShares Barclays 20+ Year Treasury Bond, TLT

Powershares DB US Dollar Index Bullish, UUP


So no shooting star. No bearish engulfing candle. Just a gap up on a strong candle for TLT and a continuation of the resting/flagging since Friday for UUP. Does that mean that we have not topped and are ready for more upside? Not necessarily, as both TLT and UUP are testing resistance (108 for TLT and as marked on the chart for UUP), but it does tell us that the long foretold bubble top in bonds and the dollar did not happen today. In fact what we learned today was that the bond and dollar bulls, after an early lunch, came back to their screens and saw the pullback as value and started buying again.

So maybe we do go higher still or maybe we don't, but we learned, that for today, that the bulls are still in charge.

Trade well.

Is the Bond/Dollar Run Over?

It is interesting that more equity traders a now paying attention to the price action in bonds and the dollar. Sentiment traders would think this might suggest a top is near. But part of the attention is due to the rise of ETF's available to trade these markets. In fact these ETF's do a pretty good job of communicating information on the macro markets to equity traders without leaving their space. This is valuable information as to the potential future direction for equities.

I posted these two charts about 10:30 today

iShares Barclays 20+ Year Treasury Bond, TLT


Powershares DB US Dollar Index Bullish, UUP


When I first posted them I noted that it was early in the day but that something interesting was happening. The US Dollar Index and Treasuries have been trading in tandem lately. The TLT is creating a shooting star formation. This is where the price opens on a gap and jumps higher only to fall back. If it closes this way it is very bearish. It's companion lately, UUP, is in the process of printing a bearish engulfing candle. This is also bad news for the pair and confirmation of a potential topping process in Treasuries.

Be watchful as to how these close. Strong Bonds and Dollar have been driving equities lower. Use these new tools. A reversal could change things.

Trade well.

Is The Market Still Bullish on Bonds?

Is the market still bullish on US Treasury Bonds? There was a lot of discussion today about blow off tops in bond prices or that yields could not go any lower. Others were stating that the strong bond market is signaling the equity market that it should get ready to move lower still. So which is it. Here is one view from looking at the activity in the iShares Barclays 20+ Year Treasury Bond ETF ticker: TLT and its bearish half-cousin ProShares Ultrashort Lehman 20+ Year Treasury ETF ticker: TBT. Understand that these are not mirror images of each other but are liquid trading vehicles used by professionals and a decent proxy for the view on Bonds. Look at the charts over the last 4 months:

iShares Barclays 20+ Year Treasury Bond ETF, TLT


ProShares Ultrashort Lehman 20+ Year Treasury ETF. TBT


TLT has been been in a channel between 98 and 102 over much of this period but in a rising trend the month of August. Volume has been fairly steady throughout this time frame. During the recent rise the RSI and MACD have been trending up along with the price. Today there was a big gap up and strong candle today but volume did not change today. This would lead you to believe that today's move was not a blow off top.

TBT has been trending downward but found a range over mid June to the end of July. Volume was steady over that time period. For the month of August the trend has been down and volume has not changed much. During the recent downtrend the RSI and MACD have been trending along with the price. Today there was a big gap down and strong candle with increasing by more than 75% over the recent trend. This might make you consider that a blow off bottom was occurring.

So which one is it? Is the run in Bonds done or is the move higher poised to continue? How about a different explanation. If you are confused as to which answer is right isn't it possible that the market is confused also?

Let me suggest a different explanation as to what is happening. Holders of TLT believe that bond prices can still go higher, meaning that yields move lower. They are unwilling to sell their holdings due to their conviction. Holders of TBT may be in one of two camps. The first one is betting that prices have topped and yields are going higher. In the second camp are those that are holding TLT that are hedging their bets by going long TBT. This is the new money added or increase in volume today.

So perhaps the balance between the long view and short view on bonds is shifting, but only slowly with the longs just hedging their bets. The tell will be what happens on the next move.