Saturday, June 29, 2013

Bond yields take center stage

Bonds continue to take center stage as equities remain in limbo following the 6% decline in the S&P 500 Index (SPX).  The 30-year mortgage yield rose by some 62 basis points recently to 4.18%. As economist Ed Yardeni points out, “The most immediate impact has been a sharp drop in mortgage refinancing activity.”

According to the Investment Company Institute (ICI), there were significant net cash outflows from bond mutual funds totaling an estimated $13.5 billion during the week of June 12.  This followed a $10.9 billion outflow the prior week.  Yardeni points out that those funds weren’t rotated into equity mutual funds, which had small net outflows totaling $2.0 billion those same two weeks.  So much for the theory espoused by many analysts that the mass unloading of bond funds would be good for stocks.  

As we’ve discussed in recent weeks, rising Treasury yields are rarely good news for stocks, at least on not on a short-term basis.  Indeed, the damage done to stocks by rising bond yields is palpable.  In just two days last week the equity market lost $775 billion in value, which was equal to nine months of Fed bond buying.  Japan’s Nikkei index lost 20% in just two weeks while China’s Shanghai Composite Index lost a comparable amount in value this month after a spike in short-term rates.

In the immediate-term, rising yields are still a problem for stocks.  TNX remains above its rising 15-day and 30-day moving averages, which collectively delineate the dominant near term trend for Treasury yields.  A decisive close below the 15-day MA would be a preliminary sign that the yield uptrend is turning while a close below the 30-day MA would formally break the trend.  This in turn would presumably bring relief for stocks.

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