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.

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Callum Thomas

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