YIELD ON 10-YEAR NOTE HITS NEW FOUR-YEAR HIGH -- THAT'S BAD FOR HOMEBUILDERS AND RETAILERS -- ESPECIALLY THOSE TIED TO HOME IMPROVEMENT AND FURNISHING
NEW HIGH FOR YIELDS ... The yield on the 10-year Treasury Note touched a new four-year high today. The weekly bars in Chart 1 show that the uptrend in long-term interest rates began exactly a year ago. The fact that bond yields were headed higher was confirmed in the spring of this year when they exceeded the 2004 high at 49 (4.90%). There are a lot of ripple effects from rising bond yields. One is falling bond prices. Rising rates also tend to slow the economy. Today's report that leading economic indicators for May fell by the biggest amount in nine months shows that economic slowing is already happening. [This is the first time the LEI has fallen for two consecutive months since the first quarter of 2001]. Rising yields also push mortgage rates higher which is especially negative for homebuilding stocks and stocks tied to housing. That includes home improvement stocks and sellers of home furniture.
Chart 1
DR HORTON FALLS AS RATES RISE ... One need only look at the next chart to see the dramatic impact the direction of bond yields has on homebuilding stocks. The monthly bars chart DR Horton, which is the largest U.S. builder of new homes. The stock peaked last summer and has fallen to the lowest level in eighteen months. Since its peak last August, DHI has lost 40% (while the Homebuilding Index has fallen by 26%). During that same time span, the S&P 500 has gained 1.5%. That shows just how badly homebuilders have done over the last year. The green line in Chart 2 is the ten-year T-note yield. Notice the inverse correlation between the two markets. The peak in bond yields at the start of 2000 helped launch the recent housing boom which was reflected in rising homebuilding stocks (green line). It wasn't until last summer that bond bond yields started to climb which coincided with the homebuilding peak (red line). The bearish turn in the group was confirmed by the downturn in the monthly MACD lines. Only recently have the economic numbers began to confirm what the charts told us a year ago -- that rising bond yields almost single-handedly ended the five-year housing boom.
Chart 2
RISING RATES HURT HOME-RELATED STOCKS ... A case can also be made that the peak in homebuilders has had a negative impact on other stocks related to housing. That includes home improvement stocks (like Home Depot) and home furnishings (Bed Bath & Beyond). The weekly bars in Chart 3 show BBBY falling today very close to a new two-year low. Notice that the stock peaked last August at the exact same time as homebuilders (see circle). The solid blue line is the price of Home Depot. The big home improvement stock appears to have also suffered along with homebuilders (although not quite as much).
Chart 3
RISING RATES ALSO HURT RETAIL SECTOR... To widen the net of stocks hurt by rising rates even further, the next chart shows weekly bars for the Retail Holders for the last two years. The group also peaked last August just as bond yields were starting to climb. The more telling line is the RLX/SPX ratio which is the solid blue line . That RS line shows that retailers in general started to underperform the S&P 500 at the same time that homebuilders peaked. That's just more evidence of how rising bond yields can hurt the stock market -- especially those market groups that are dependent on low interest rates -- like homebuilders and retailers. With those negative influences already well established, it's just a matter of time before rising rates start to the damage the entire stock market and the economy. Today's weak economic news (following the recent stock market fall) suggests that we may have reached that dangerous point on both counts.
Chart 4
