Intermarket Divergence: Bond Yields Too Low?

Intermarket Divergence: Bond Yields Too Low?


In the latest edition of the Weekly Macro Themes, I took a multi-dimensional look at Treasuries; specifically focused on the US bond yield. I checked out a couple of my favorite indicators including global sovereign bond breadth (like the market breadth metrics we know and love from the stockmarket, but applied to the bond market), bond market volatility (which just bounced from an all time record low), macro indicators such as the PMI and a selection of leading indicators, and of course some creative intermarket analysis, such as the chart below…

This chart shows the spread between the rolling annual performance of global consumer discretionaries vs staples… and compares that to the US 10-year government bond yield. The economic logic is that discretionary stocks should outperform staples during times of rising consumer demand, and typically their relative performance does roughly trace with the economic cycle/macro pulse.

Indeed, as the chart shows, there is a loose link between them: sometimes one leads the other, and other times it lags. Most of the time however there is a reasonably reliable coincident relationship.

Some say that coincident indicators don’t tell you anything, they just confirm or repeat what the other market is saying. But I find firstly, that in and of itself can be quite useful (as a source of confirmation), and indeed sometimes it might actually be easier to have a view on the coincident indicator than the market to which you are comparing it.

Aside from that, where coincident indicators can be really useful is when divergences show up, such as the one in the chart above. If you assume that global consumer stocks are “right” in the signal they are sending then bond yields look way too low. Even if they are only half right it would appear to me that central banks are currently going through the exercise of “holding a ball under water” vis a vis QE.

Bottom line: bond yields look too low, especially when you factor in the spectrum of information from technicals, sentiment, macro, and intermarket analysis—such as the chart we looked at today.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



Source link

Callum Thomas


Leave a Reply

Your email address will not be published. Required fields are marked *


About us

InvestLab is a financial services technology company focused on the global trading market. Founded in 2010 in Hong Kong, the company develops trading, market data, and social research products that enable individual investors and small to mid-size brokers to access global markets. We provide brokers and financial institutions cross border capabilities for retail investors into 43 markets globally.


CONTACT US

CALL US ANYTIME