Intermarket Divergence: Bond Yields Too Low?
Callum Thomas | Aug 19, 2020 12:39AM ET
In the latest edition of the , I took a multi-dimensional look at Treasuries; specifically focused on the US 10-year bond yield. I checked out a couple of my favorite indicators including global sovereign bond breadth (like the market breadth metrics we know and love from the stockmarket, but applied to the bond market), bond market volatility (which just bounced from an all time record low), macro indicators such as the PMI and a selection of leading indicators, and of course some creative intermarket analysis, such as the chart below...
This chart shows the spread between the rolling annual performance of global consumer discretionaries vs staples... and compares that to the US 10-year government bond yield. The economic logic is that discretionary stocks should outperform staples during times of rising consumer demand, and typically their relative performance does roughly trace with the economic cycle/macro pulse.
Indeed, as the chart shows, there is a loose link between them: sometimes one leads the other, and other times it lags. Most of the time however there is a reasonably reliable coincident relationship.
Some say that coincident indicators don't tell you anything, they just confirm or repeat what the other market is saying. But I find firstly, that in and of itself can be quite useful (as a source of confirmation), and indeed sometimes it might actually be easier to have a view on the coincident indicator than the market to which you are comparing it.
Aside from that, where coincident indicators can be really useful is when divergences show up, such as the one in the chart above. If you assume that global consumer stocks are "right" in the signal they are sending then bond yields look way too low. Even if they are only half right it would appear to me that central banks are currently going through the exercise of "holding a ball under water" vis a vis QE.
Bottom line: bond yields look too low, especially when you factor in the spectrum of information from technicals, sentiment, macro, and intermarket analysis—such as the chart we looked at today.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.