JUMP IN GERMAN BUND YIELD HELPS BOOST TREASURY BOND YIELDS -- THAT'S GOOD FOR BANK AND INSURANCE STOCKS WHICH ARE TRADING HIGHER TODAY -- THE DOLLAR DROP IS PUSHING COMMODITY PRICES HIGHER
GERMAN BUND YIELDS ARE RISING AS MANAGERS SELL... Something unusual is happening in Europe. For the first time in awhile, money managers are selling eurozone sovereign bonds which is pushing their yields higher. The best example is Germany. Chart 1 shows the 10-Year German Treasury yield jumping to 0.28% which is the highest level in six weeks. It has also climbed above its 50-day moving average for the first time in more than six months. The reason for the jump in the German yield is heavy selling of the 10-Year German bund. Chart 2 shows the Power Shares German Bund Futures ETN (BUNL) falling to the lowest level since early March. That may have something to do with selling of European stocks today, especially in Germany. The German DAX fell 378 points (-3.2%). French shares lost 133 points (-2.5%). Chart 3 shows the Dow Jones German Stock Index falling below its 50-day average to a six-week low. Up until this week, German bund prices and stocks had been rising together. Now they're both falling. The recent jump in the Euro may also be causing some selling in export-oriented German stocks. Most other foreign markets are down today, which may be contributing to some selling in the states. The jump in eurozone yields may also explain today's big jump in Treasury yields.
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Chart 1
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Chart 2
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Chart 3
TREASURY BOND YIELDS ARE JUMPING... I've explained several times that U.S. bond yields are closely tied to yields in foreign markets, especially in Europe and Japan. Falling eurozone yields have driven money into higher yielding Treasuries, which has pushed Treasury bond prices higher and their yields lower. This week's reversal of those trends in Europe (especially in Germany) may explain why Treasury bonds are falling sharply today and their yields jumping. Chart 4 shows the 10 Year Treasury Note Yield jumping to the highest level since mid-March. It has also climbed above its 50-day moving average. Chart 5 shows the 30-Year T-Bond Yield jumping even more. I suspect that has more to do with the higher yields in Europe than anything coming from the Fed. Part of the global bond selling may also be coming from a whiff of inflation resulting from higher commodity prices and a weaker dollar. Industrial and precious metals have jumped this week while crude oil is rising today to another 2015 high. Today's higher yields are helping bank stocks.
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Chart 4
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Chart 5
BANKS BENEFIT FROM RISING TREASURY YIELDS... Banks are one of the few market groups in the black today. I suspect the reason for that is today's jump in bond yields. A large part of bank profits comes from the net interest margin, which is the difference between what they pay depositors (short term yields) and what they charge borrowers (long term yields). In other words, the yield curve. When long term rates are higher than short-term rates, and are rising faster, banks make more profits. With short-term rates pretty much anchored by the Fed (and unlikely to change anytime soon), the widening yield curve is coming mainly from higher bond yields. That's good for banks. Chart 6 shows the KBW Bank SPDR (KBE) trading up today and nearing a new closing high for the year. A new high would put the KBE at the highest closing level since 2008. The KBE/SPX relative strength ratio (top of chart) is also jumping today. After bottoming in January, it's been trading sideways since March. That trend has closely tracked the trend of bond yields.
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Chart 6
BANKS AND BOND YIELDS ARE LINKED ... Chart 7 shows the close correlation between the 10-Year Treasury Yield (green line) and the "relative" performance of banks versus the S&P 500 (black line). Falling yields since the start of 2014 coincided with a falling KBE/SPX ratio. Both bottomed together in January. Falling bond yields during March pulled the bank RS line lower. Today, however, both are jumping. Insurance stocks are also strong today. They're another group that benefits from rising bond yields, but for a different reason.
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Chart 7
INSURANCE INDEX CLEARS 200-DAY LINE... Insurance stocks are also strong today. Chart 8 shows the Dow Jones US Life Insurance Index climbing above its 200-day moving average. It may close above that resistance barrier for the first time this year. Insurance stocks also benefit from rising bond yields. The reason why is that most of their premium portfolio is invested in Treasury bonds. Rising bond yields increase the value of that portfolio.
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Chart 8
FALLING DOLLAR BOOSTS OIL AND OTHER COMMODITIES... One of the reasons bond yields are starting to climb is rising commodity prices resulting from a falling dollar. Bond yields are highly correlated to inflation trends. Chart 9 shows the PowerShares Dollar Bullish ETF (UUP) falling sharply today to the lowest level in two months. That's boosting commodity prices, many of which are up again today. Crude oil is up $1.79 (3.1%) and has touched a new 2015 high. Chart 10 shows the PowerShares Energy ETF (DBE) exceeding its February high to reach a new high for the year. That should make bond traders nervous. Rising commodity prices also help explain why energy, materials, and mining stocks are the strongest sectors on the day. Industrial and precious metal stocks are trading higher. The third strongest group is financials (led by banks and life insurance). That makes sense. Rising commodities lead to higher bond yields, which lead to higher bank and insurance stocks. On the downside, rising oil prices are pushing airline stocks 3% lower which is weighing heavily on transportation stocks (see Chart 10). The U.S. stock market is trading lower today. The drop in foreign markets may also have something to do with that.
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Chart 9
