Bond Market Front and Center
CAMS Weekly View from the Corner – Week ending 6/25/21
June 28, 2021
The bond market, as a central determinant of market based interest rates, plays a key role for all markets. More specifically, the Treasury bond market is front-and-center in this role. If bond market participants sell off bonds their prices drop and through this their interest rate (known as yield) rises which leaves a trail of consistently rising interest rates. For the bulk of 2021 we have seen this play out within the Treasury bond market. As most are aware society has experienced a notable increase in price inflation and in some areas of the economy startling price increases. Price inflation is a great nemesis for bond market participants because the interest rate paid from bonds is a fixed rate. With this, if inflation is running hot, or worse, if participants expect them to continue to do so then that fixed interest rate gets chewed up quickly by rising price inflation. Hence their motivation for selling bonds to evade such a scenario. Enter May & June Around mid-May up through most of June the 10 Year Treasury bond interest rate (yield) began moving lower as bond market participants were bidding up bonds right into the teeth of notable price inflation. The bond market is a very smart market so when it behaves out-of-character (think notably rising price inflation and bond market participants want to own bonds?) it gets attention of all participants meaning all markets. Adding to the backdrop, stock market volatility measures incurred bouts of upward pressure as well as Consumer Discretionary stocks began looking like they were trying to break down on a trend basis. Wait: Consumer Discretionary stocks getting sold? Society opening up with the citizenry filled with pent up desires to go spend coupled with the money to do so via numerous stimulus packages and enhanced unemployment benefits and Consumer Discretionary stocks are trying to go lower? All-the-while, Treasury bonds acting out-of-character as they offered hints of flight to safety bidding by participants? Market Messages It is crucial to realize markets of all stripes are always focused on the forward view. They focus on the future always working on discerning where the economic storyline is heading and in so-doing price assets today according to that collective forward expectation. When a market as smart as the Treasury market behaves out of consensus expectation and then other markets begin to send messages notably different from consensus it is wise to take note. For our part, internally, we have been noting this inter-market behavior and are now focused on these behaviors as well as others that are seemingly attempting to develop. If markets are beginning to get concerned about the forward landscape they will initially share their concerns somewhat quietly via inter-market message as noted. If Consumer Discretionary stocks cannot hold themselves together on a price basis while Treasuries continue to become more attractive to bond market participants and stock volatility continues to offer sudden and seemingly out-of-nowhere upward pressure then the inter-market message will be continuing to offer concerns. It is too early for certainty but in recent weeks these market messages have garnered attention. These may be inter-market tremors that amount to nothing as markets broadly work on trending higher. When participating in extreme valuation market landscapes, such as we are now, which are up via an on-going printing press operation from the Federal Reserve, it is essential to note any out-of-character behavior from a market as smart as the Treasury bond market. For now, we watch the Treasury bond market as the epicenter of this message. I wish you well…
Director, Market Research & Portfolio Analysis
H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.
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