TEN-YEAR TREASURY YIELD IS BOUNCING OFF MAJOR SUPPORT -- BOND/STOCK RATIO ALSO RUNS INTO RESISTANCE AND HAS STARTED TO WEAKEN -- THAT WOULD FAVOR STOCKS OVER BONDS -- RECENT SECTOR ROTATIONS SHOW A SHIFT TO MORE ECONOMICALLY-SENSITIVE STOCK GROUPS
TEN-YEAR TREASURY YIELD IS TESTING MAJOR SUPPORT...Bond yields have been falling all over the world since the end of last year. Several foreign government bond yields have fallen deeply into negative territory and have helped pull Treasury yields lower. The 30-Year Treasury Yield recently fell to a new record low. There is one very important yield benchmark, however, that has yet to do so. That's the 10-year Treasury yield. And it's reached an important chart point.
The monthly bars in Chart 1 show the 10-Year Treasury Yield testing previous lows set during 2012 and 2016 (see circles). It also remains just above its record low set in July 2016. That puts the TNX in a potentially important support zone. In addition, the lower box shows the 9-month RSI line in the most oversold condition below 30 in the last decade. That also suggests that the decline in Treasury yields may have been overdone on the downside. That may not be enough to signal a bottom in yields; or even the start of a major upturn. But it might be enough to suggest a rebound of some type, or a period of more stability. If it does, that could impact not just bond prices, but their relationship to stocks. It could also signal some sector rotations away from dividend-paying stocks into more economically-sensitive cyclical stocks. And some buying of value-oriented stocks that have lagged behind the market all year.
BOND/STOCK RATIO MAY BE STALLING...Thanks to the plunge in bond yields, prices of longer-term bonds have done better than stocks this year. But that too may have run too far, too fast. Chart 2 plots a ratio of the 20-Year Treasury Bond iShares divided by the S&P 500 SPDR (SPY) since the start of 2018. The bond/stock ratio spiked higher during the fourth quarter of last year as investors fled to the safety of Treasuries as stock prices fell sharply. The falling ratio during the first half of this year reversed those trends as investors moved back into stocks. The ratio bottomed during April, and spiked higher during July and August as stock prices weakened and investors moved back into bonds. Chart 2, however, shows that the ratio has reached a potential resistance level formed at the end of last year. That suggests that the bond/stock ratio may be stalling in that region. If it does, that would suggest that the recent surge into bonds may be slowing, and that the pendulum may start to favor stocks over bonds again.
Chart 3 plots the same TLT/SPY ratio since 2009 when the bull market in stocks began. It also shows a falling trendline drawn over the highs of those ten years. And it shows the bond/stock ratio reaching that potential long-term resistance line (see arrows). That also suggests that the recent rotation into bonds may have been overdone. Which suggest that the decline in bond yields has been overdone as well. If bond yields do rebound (and bond prices weaken), that would not only favor stocks over bonds. It could also signal sector rotations within the stock market away from defensive dividend-paying stocks into more economically-sensitive cyclical sectors. We're also seeing some of that starting to happen.
SECTOR LEADERSHIP...The direction of bond yields impacts sector rotations within the stock market. Chart 4 shows market leadership over the past year favoring real estate (REITS), utilities, and consumer staples. All three are dividend-paying stocks that do better when bond yields are falling. Technology also had a strong year. At the same time, more economically-sensitive sectors like financials, industrials, and consumer cyclicals lagged behind. Financials like banks were hurt by falling bond yields. Energy and materials reflected weakness in economically-sensitive commodity prices like oil and industrial metals. Safe haven gold miners were their big winners. But some of those rankings are starting to shift.
RECENT SECTOR SHIFTING...Chart 5 shows is a relatively short-term look at the last week's sector rankings. But does reveal some shifts in leadership taking place. And those shifts are taking place as bond yields have started to rebound. The two top sectors for the week are energy and financials. Banks have been one of the biggest beneficiaries of rising bond yields. The inflationary impact of rising energy prices is also consistent with higher bond yields. Other weekly leaders are economically-sensitive industrials and consumer discretionary stocks. Defensive Real estate, utilities, and staples have fallen to the bottom of the list. That's also the result of higher bond yields. Within the materials sector, industrial metal stocks did well while defensive gold miners fell to last place for the week. Technology stocks slid in the weekly rankings as some money rotated into cheaper and more-value oriented parts of the market. That includes small cap and transportation stocks. If those recent rotations take hold, that would suggest a more optimistic mood on the economy and stock market; and more negative view of bonds.
