Monday, March 21, 2016

Bonds and Stocks are supposed to go in opposite directions

But during this massive increase in stock values over the past years, bonds have gone up together with stocks.  That is because the Fed was committed to low interest rates.

The Fed is now committed to raising rates and will when the stock market is strong enough to take a hit from doing so.

Looking at IEI, an ETF for 3 - 7 year Treasuries, you can see for the first time in a long time stocks and bonds moving in opposite direction like they should.  The candle sticks are IEI and the solid black line is SPY.

Notice how on February 11 there was a blow off top in Treasuries and there was a blow out bottom in stocks which you can't see with just closing prices (the black line).  They then moved in opposite directions.  And that was after moving in the opposite direction on the previous move after the August 2015 crash in stocks.  Finally, normalization was back.

Always being pessimistic I notice that on March 16, Fed day when the rate hike didn't happen, these Treasuries when up along with stocks.  But after March 16th which was an enormous up day, these bonds are not continuing to go up even as stocks continue to do so.

Do I think it means stocks might pull back?  Yes.  I do admit that it seems like the inflation trade is full on so I may be grasping at straws.

One thing I am more sure of is that the day of the Fed lowering interest rates is over.  Unless the economy tanks.  Then we get negative rates and bonds will go up again along with stock in the perverse fashion that has been going on for a very long time.  If negative rates are tried then when does the normalization happen?

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