TEN-YEAR YIELDS EXCEED 5% -- HOMEBUILDERS CONTINUE TO WEAKEN -- REITS BREAK 50-DAY LINE
TEN-YEAR YIELDS EXCEEDS 5% ... Last week the yield on the 10-Year T-note broke through its 2004 peak at 4.90% to reach the highest level in four years. Today the TNX has moved through the psychological level of 5%. That doesn't come as much of a surprise considering that the trend for bond yields is now higher. I suggested last week that the next upside target for the TNX was the early 2002 peak at 5.45%. While I remain convinced that bond yields have embarked on a new uptrend, there's still another technical hurdle that they have to overcome to prove that the long-term downtrend in long-term rates has finally ended. The monthly bars in Chart 2 show the downtrend in yields from the 1994 peak. I've drawn a down trendline over the 1994 and early 2000 peaks. Needless to say, a move above that resistance line would be the final sign that the era of long long-term rates has finally ended. The most immediate result of rising bond yields is falling bond prices.
Chart 1
Chart 2
BOND ETFS BREAK CHART SUPPORT ... When bond yields rise, bond prices fall. It's no surprise then to see the 7-10 Year Treasury Bond iShares IEF) falling beneath its early 2005 low. The IEF appears headed for a test of its mid-2004 low just above 79. Bond funds aren't a good place to be in a climate of rising bond yields. The IEF in Chart 3 is most closely matched to the 10-Year T-note yield. Longer bond maturities were the last to fall. But there's no doubt that they are falling. The weekly bars in Chart 4 show the 20-Year Treasury Bond Fund (TLT) establishing a bearish pattern of falling peaks and falling troughs over the last six months. While bond funds are the first casualty of rising bond yields, there are others. One is utilities which have been the worst performers in 2006. Another is housing stocks.
Chart 3
Chart 4
HOUSING STOCKS ARE ALSO FALLING ... Homebuilders are one of the sectors most sensitive to the direction of bond yields. That's because bond yields set the direction of mortgage rates. And the direction of mortgage rates is higher. The next chart shows the PHLX Housing Index peaking last summer and dropping 10% since then. It's already formed three declining peaks and fell beneath its 200-day line today. The relatively weak housing performance can be seen in the HGX/SPX ratio just below the price bars in Chart 5. That relative strength line peaked last July and gave an early signal that the housing boom was ending. The last line on the bottom of Chart 5 shows why. It's the same bond ETF shown in Chart 3. Notice the close correlation between the peaks in bond prices and the peaks in the relative strength line (red arrows). That leaves little doubt the falling bond prices (and rising yields) are the main factor behind the selling in homebuilders. With rates climbing, the situation in housing should get even worse.
Chart 5
EVEN REITS ARE STARTING TO SLIP ... REITs (Real Estate Investment Trusts) have held up much better than homebuilders. I'm not sure exactly why, but I suspect it has to do with the fact that REITs deal less with residential housing and more with apartments, shopping malls, and office buildings. REITs also pay high dividends. Even REITs, however, aren't immune from rising interest rates. And that's what this next chart shows. REITs are among today's weakest market performers. The daily bars show the Realty iShares (ICF) having broken their 50-day moving average for the first time since last November. Its relative strength line has also broken a five-month up trendline. Those are two signs that some money is leaving REITs for a better location. Judging from the sector performance numbers since the start of the year, that better location has been energy and basic materials which are the year's top sector performers. That makes sense. Rising inflation pressures are pulling bond yields higher. The best way to deal with that is to own inflation-type stocks and move out of those that are most hurt by rising interest rates. The latter group would include utilities and anything tied to housing or real estate. It may be just a matter of time before rising bond yields begin the hurt the rest of the market. That may start to happen after the month of April when the market begins its weakest six months of the year.
Chart 6
HAPPY PASSOVER AND EASTER ...
