10-YEAR BOND YIELD SURGES TO TWO-MONTH HIGH AND MAY BE ON VERGE OF UPSIDE BREAKOUT -- FOREIGN YIELDS ARE ALSO JUMPING -- THAT'S PUSHING BOND PRICES SHARPLY LOWER -- UTILITIES AND REITS ARE STARTING TO SHOW SERIOUS UNDERPERMANCE
10-YEAR TREASURY YIELD SURGES... The daily bars in Chart 1 show the 10-Year Treasury yield ($TNX) jumping 7 basis points today to the highest level in two months in one of the biggest daily gains this year. That puts the yield within striking distance of its late October intra-day peak at 2.47%. Needless to say, a close above that previous high would break the TNX out of the trading range it's been in over the last two months and would put it at the highest level in nine months. The sudden jump is most likely tied to the vote for tax reform which appears imminent. Passage of the tax reform package would add more than a trillion dollars to the Federal budget deficit. That would force the government to sell a lot of bonds to fund that debt. And the increase in the supply of bonds would push bond prices lower and bond yields higher. It's also worth noting that foreign bond yields are jumping sharply today. Canadian yields are up 8 bps, while 10-year yields in Germany and the UK jumped by 7 and 6 bps respectively. The jump in German yields was the biggest in five months. That's being blamed on a hawkish comment by an ECB member regarding the path of interest rates next year. Whatever the reason, the main point is that global yields are all jumping together. Rising foreign yields are giving a big boost to Treasury yields. That's bad for bond prices which are falling sharply. Along with stocks tied to bonds like utilities and REITs.
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Chart 1
BOND PRICES FALL SHARPLY ... The daily bars in Chart 2 show the 20+Year Treasury Bond iShares (TLT) falling sharply today. The TLT recently failed a test of its early September high. It's also in danger of slipping below its 50-day average. Chart 3 shows the 7-10 Year Treasury Bond iShares (IEF) in much worse shape. The IEF has fallen to a two-month low and is trading below its 200-day average (red circle). Both of their longer range chart patterns (shown in previous messages) picture a market going through a major topping process. That's also negative for stocks tied to bonds.
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Chart 2
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Chart 3
UTILITIES AND REITS ARE BEING SOLD ... Two stock groups that pay high dividends and are viewed as bond proxies are utilities and REITS. As a result, they tend rise and fall with bond prices. Right now, they're falling. The daily bars in Chart 4 show the Utilities Sector SPDR (XLU) falling below its 50-day average to the lowest level in two months. More striking is the plunge in the XLU/SPX relative strength ratio (red line). That shows how much utilities are underperforming the broader market. That's added confirmation of the more bearish outlook for bonds. The same is true of REITS. Chart 5 shows the Real Estate Sector SPDR (XLRE) down sharply today and in danger of falling below its 50-day line. Its relative strength ratio (red line) looks a lot worse. That's a pretty clear sign that stock investors are preparing for even higher bond yields. What's bad for utilities and REITs, however, is good for financial stocks like banks that do better in a rising yield climate. Along with economically-sensitive stock groups that stand to benefit from lower taxes and a stronger economy. A stronger economy should also add to upward pressure on bond yields.
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Chart 4
