FALLING BOND YIELDS CAUSE FLIGHT TO SAFETY OF TREASURY BONDS -- TEN YEAR - 3 MONTH YIELD CURVE INVERTS -- STOCKS CONTINUE TO WEAKEN -- DOW TRADES BELOW ITS 200-DAY AVERAGE -- NASDAQ AND S&P 500 ARE THREATENING THEIR RED LINES
TEN-YEAR TREASURY YIELD MAY BE HEADING TO 2%... The surprising drop in global bond yields is continuing. The weekly bars in Chart 1 shows the 10-Year Treasury Yield falling today to 2.22% which is the lowest level since September 2017. The weekly bars in Chart 1 show the next level of support for 10-year Treasuries in the 2.10%-2.03% range which were the previous intra-week lows formed during 2017. Foreign yields are doing even worse. German and Japanese 10-year yields have fallen to three-year lows, while Australia has fallen to a new record low. With foreign yields so much lower than the U.S., that's creating global demand for higher yielding Treasuries. With global stocks also under pressure, a flight to the safety of Treasuries is also taking place.
TREASURY BOND PRICES ARE SURGING... When bond yields fall, bond prices rise. And that's just what they're doing. The weekly bars in Chart 2 shows the 20+Year Treasury Bond iShares (TLT) surging to the highest level since 2016. Longer maturity Treasuries are leading the bond rally. And for the first time since the fourth quarter, bond prices are doing better than stocks.
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Chart 1
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Chart 2
TREASURY BOND/STOCK RATIO IS RISING ... Chart 3 plots a ratio of the 20+Year Treasury Bond iShares (TLT) divided by the S&P 500 over the last year. And it shows the bond/stock ratio turning up during May and now trading at the highest level since the start of the year. The last time bonds did better than stocks was during the fourth quarter of last year when falling stock prices caused another flight to the safety of Treasury bonds. One of the concerns about falling bond yields is the risk of an inverted yield curve which could pose a threat to the U.S. economy.
TEN YEAR - 3 MONTH YIELD SPREAD INVERTS... Chart 4 shows the spread between the ten-year Treasury and three-month Treasury yields already falling into negative territory below zero for the second time this year (plotted through yesterday). It's now trading at the lowest level since 2007.
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Chart 3
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Chart 4
DOW LOSES 200-DAY LINE -- THE NASDAQ AND SPX MAY BE NEXT ... Stocks remain under pressure today. And are undergoing an important test. Chart 5 shows the Dow Industrials falling below its 200-day average today. It's also trading below its March intra-day low at 25,200. A close below that level would put the Dow at the lowest level since early February. Chart 6 shows the S&P 500 sitting right on its red line. It's next potential support would be its March intra-day low at 2722. Chart 7 shows the Nasdaq Composite Index also threatening its 200-day line. Its March intra-day low is at 7332. Closes below their 200-day lines would increase the likelihood a bigger retracement of their 2019 gains; probably in the range of 38% to 50%.
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Chart 5
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Chart 6
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Chart 7
THE VIX IS RISING BUT REMAINS BELOW RESISTANCE... When stocks fall, the CBOE Volatility (VIX) Index usually rises; as it's doing today. Chart 8 shows the VIX gaining nearly 4% to 18 which is the highest level in nearly two weeks. But it remains well below its May intra-day peak at 23; and the psychologically important resistance level at 20.
