Some messages from bonds this week, and mercifully no mention of the Amigos even though 2 of them are implied below. :-)
2s and 10s are accelerating the uptrend and breaking the downtrend, respectively.
That continues to paint a declining yield curve, much to the chagrin of the risk ‘off’ players laying in wait.
Because I always love colorful big pictures, here’s the yield curve’s longer view. “Op Twist by another name & method” is of course the Mnuchin scheme to manipulate the curve lower still…
As of now the 2yr yield is well above the Fed Funds rate (FFR) but after tomorrow the FFR will climb another .25. To review, we have shown that when the Fed over shoots the FFR and the 2yr starts negatively diverging it is time for extreme caution. I guess you could call this a 4th Amigo (sorry). As of now, there is no negative divergence whatsoever. Quite the contrary. The 2 is dutifully leading the way higher for the FFR.
The ratio of the Bank index to the S&P 500 is looking pretty bullish and it is also constructive for the 10yr yield Amigo (okay, I lied; the Amigos are too important to leave out).
Here is the 10yr Amigo’s big picture. The target is 2.9% and then limitation (into deflation/contraction) or breakout (potentially into a full frontal Crack Up Boom inflation). I’ll lean to Thing 1 for now.
A closer view of the bond still down from the bear flag and the yield breaking upward.
Here is the 10’s big brother, the 30. It is having trouble getting going (is Mnuchin reducing supply already?). But the long bond is still down from the bear flag/wedge. I could draw a new parallel line showing no breakdown, but it could still be a bear flag.
Maybe I am imagining it, but it feels like this guy is in the market fighting me on this.
The 2yr is most aggressive and this goes with the boom and paints the Fed as fully in control of the Golidlocks environment.
There is no fear of inflation, which makes sense because more and more people are vested in the area that the inflation has rooted on this cycle, the stock market (Sentimentrader).
Globally, there is no inflation either as governments have mandated that there is no inflation by legislating NIRP upon manip’d bond markets. But look at the US 10yr. The best theory I’ve heard is that US yields have been held down due to their relatively high rate of interest and buying by global NIRP refugees. But what if US yields alone begin to rise despite this (and Mnuchin)? Very interesting.
TIPS vs. 7-10 year bonds is rising in line with the firmer 10yr yield but wallowing vs. 20+ year bonds due to the 30yr’s issues as noted above. The view is mostly Goldilocks for now with little inflation painted into the picture. Just don’t include home prices, college tuition and other items that are leveraged to the continual credit creation.
What will happen to that stuff if long-term US yields break the limiters (2.9% on the 10yr & 3.3% on the 30yr)? Well, that’s for the big picture Amigos macro theme to eventually conclude and we’ll save it for later. But it never hurts to ask those questions well ahead of time.
One last chart, shows junk bonds in an ongoing gentle downtrend vs. Investment Grade and long-term Treasury. On the face of it that is a negative divergence to the risk ‘on’ trades. Maybe it will eventually grind its way to being a full fledged bearish indicator. But also, in its lack of any impulsive downside I wonder if it is simply acting as an indicator of a rational market. More likely, casino patrons are busy with Bitcoin and the stock market itself leaving the formerly hot junk play behind. But whatever, fwiw…
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