TEN-YEAR TREASURY YIELD BREAKS OUT TO HIGHEST LEVEL SINCE 2011 ON STRONG ECONOMIC NEWS -- STOCKS RALLY WITH YIELDS AS BOND PRICES FALL -- THAT'S GIVING A LIFT TO BANKS AND OTHER FINANCIALS
TEN-YEAR TREASURY YIELD ACHIEVES MAJOR BULLISH BREAKOUT... Treasury yields have finally achieved the upside breakout that many of us have been warning about. And it's doing it in pretty decisive fashion. The daily bars in Chart 1 show the 10-Year Treasury yield surging above its May peak near 3.11%. But that's only part of the story. Longer-ranger charts show that today's upside breakout carries major trend considerations. The monthly bars in Chart 2 show today's upside breakout pushing the TNX well above its late 2013 peak to the highest level since 2011. That impressive breakout appears to have completed the major bottom in bond yields that started with their 2012 bottom. As I suggested in a recent message, higher Treasury yields are being supported by rising yields in Europe and Japan. The main reason for today's breakout is strong economic news. That may explain why stocks are rising at the same time. Money coming out of bonds appears to be moving into stocks. That's especially true of financials.
(click to view a live version of this chart)
Chart 1
(click to view a live version of this chart)
Chart 2
RISING YIELDS BOOST FINANCIALS ... Financial stocks usually get a boost from rising bond yields. And they're doing that today. Chart 3 shows the Financial Sector SPDR (XLF) climbing back above its (red) 200-day moving average. It's also the day's strongest sector. Its two leading groups are banks and life insurance which are especially sensitive to rising yields. Financials have been one of the year's weakest sectors, while investors have been waiting patiently for some signs of a rebound. Today's breakout in bond yields is a good start in that direction. On the downside, however, bond proxies like utilities and REITs are having a down day.
(click to view a live version of this chart)
Chart 3
ENERGY STOCKS ARE ALSO LEADING ... Energy stocks are the day's second strongest sector. Chart 4 shows the Energy Sector SPDR (XLE) nearing a challenge of its spring high. Energy stocks are rising along with the price of crude oil and other energy markets. Crude oil has risen to the highest level in close to four years. Chart 5 shows the United States Oil Fund (USO) hitting another multi-year high today. Rising energy prices are potentially inflationary and are often tied to rising bond yields. Add rising energy prices to strong economic news in the U.S. and rising bond yields abroad to the reasons why bond yields are finally breaking out to the upside. And explains why it makes sense to see banks and energy stocks leading the market higher.
(click to view a live version of this chart)
Chart 4
