Bond Signals

Reading Ric’s post on Iron Ore from yesterday (click here) reminded me of the way in which markets can inform other markets. With concerns about the potential impact of the end of US Fed stimulus, it may be a good time to check on what bond markets are saying.

Here’s the US ten year bond chart:

US T-Note 10 YR (Cash) – daily

20130530 us 10

If this was a stock, I’d sell it. A clear (and steep) down trend, and a breach of support suggest there are significant further falls to come. Remembering that as interest rates go up, bond prices go down, the outlook for much higher long term interest rates is clear.

Here’s the long term view on US 10 year bond rates:

20130530 us 10 yr

This chart shows the yield of the ten year bond (as an index, to provide a constant 10 year maturity). If bond yields return to 2011 levels around 3.5%, that will mean a bond price below $120 – or more than ten big figures lower! While this won’t occur immediately, it has me looking at a swing trade:

20130530 us 10 tkt

Of course, this sort of move represents a vast change in bond market conditions, that will affect other markets globally.

Higher interest rates means that companies face higher borrowing costs, and the discounted cash flow principles underlying many analysts valuation models will deliver lower estimated values for shares.

Counter-intuitively, the firsts two years or so of rising interest rates often sees rising share prices. This is explained by the factors driving rates higher – better economic growth means better company earnings. It may also be a product of a shift in asset allocation – investors moving away from bonds into more growth related investments.

The key take out is that bond markets are telling us that market behaviour is changing – a good time for traders to consider their current strategy and tactics.

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
This entry was posted in Bonds, Shares, Stocks, Trading and tagged , , , . Bookmark the permalink.

1 Response to Bond Signals

  1. Apt Capital says:

    I don’t think that this time rising rates will co-incide with rising stock prices.

    Normally interest rates rise because central banks raise them as the economy is recovering.

    Now rates are rising because the Fed is reducing QE (raising the cost of money) but the world economy is slowing not growing. Central Banks are tightening because low rates have inflated asset bubbles without creating self sustaining recoveries in the real economy.

    We may well see falling bonds and falling equities; another perverse outcome of “unconventional monetary policy”.

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