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
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:
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:
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.