From the Desk of Ian Culley

If bond markets aren’t stressing, why should we be?

They’re the largest markets in the world. That’s why we constantly monitor credit spreads for signs of structural weakness and elevated risk.

But, as of now, we’re not seeing the slightest hint of impending catastrophe.

Despite the doom-and-gloom headlines popping up in your inbox and financial media talking heads spinning an imminent recession…

Credit spreads around the world are sending a clear message: "Relax."

Check out the overlay chart of option-adjusted high-yield credit spreads:

They’re all contracting to levels from last summer. Even the riskiest CCC-rated spread is reverting lower.

This is the exact opposite of what we would expect if the world was coming to an end and investors were running for the exits.

Instead, market participants are reaching...

From the Desk of Ian Culley @Ianculley

Whether you’re looking across the curve or around the world, interest rates continue to rise.

Benchmark rates in Germany, France, Spain, and Portugal hit fresh multi-year highs last week. Interestingly, the US 10-year yield did not. And neither did the two-, 5-, or 30-year yields.

I’m not claiming US yields have put in a lower high. It’s far too early to assume that. A downside resolution below last month’s pivot lows needs to materialize before making that claim.

Nevertheless, the lack of confirmation from US interest rates is intriguing, especially as European yields turn lower this week.

Check out the triple-pane chart of Developed European 10-year yields (Germany, France, and Spain):

All three broke above their respective Oct. highs, finishing 2022 on a high note. But those breakouts were short-lived as yields are sliding lower this week. 

The lackluster moves from European yields suggest...

From the Desk of Ian Culley @Ianculley

Bonds have endured quite the year.

Perhaps 2022 marks the worst on record, or at least the past 100 years. Nevertheless, we’ve all witnessed extraordinary selling pressure in what has historically acted as a safe-haven asset. 

Despite the dismal returns and destruction of the traditional 60/40 portfolio, the bond market continues to instill valuable lessons in those willing to listen and learn.

Check out these three poignant reminders courtesy of the bond market…

Trends Persist

It’s an oldie but a goodie. And interest rates have refused to let us forget that trends persist.

The chart below highlights the five-, 10-, and 30-year US Treasury yields finding support at their respective year-to-date trendlines and pivot highs from the spring.

I thought rates might follow the...

From the Desk of Ian Culley @Ianculley  

"Trade what’s in front of you."

We say it all the time.  And it sounds simple enough.

But, with an immense amount of information circulating, it can be difficult to distinguish what’s important. 

That’s why we focus on price. Price filters the noise and useless data.

At the end of the day, it's price that pays. 

So, if bonds are breaking out to fresh multi-month highs, we should buy bonds, right?

Here’s a quick look at the bond market buy signals triggered earlier in the month: 

All three are still in play.

The five, 10-, and 30-year Treasury futures continue to churn above our risk levels. As long as that’s the case, we want to remain long toward our upside objectives...

From the Desk of Ian Culley @Ianculley

Bonds are flying under the radar.

While everyone focuses on the S&P 500 finding resistance at its 200-day moving average, bonds are posting their most substantial rally since the early 2020 peak.

Treasuries have represented downside risk for almost two years. We get it. Nobody's wanted bonds!

Neither have we – until now.

Here’s why…

Momentum

The long-term Treasury bond ETF $TLT has gained almost 20% since late October. In the process, it registered its largest four-week rate of change in a decade (aside from the covid related volatility).

This is what a momentum thrust looks like:

Notice the previous rallies in mid-2021 and earlier this summer (highlighted in yellow).

Both advances failed to produce sustained strength. It not only shows in price but also in the lackluster momentum readings that followed (highlighted yellow in the lower pane).

The...

From the Desk of Ian Culley @Ianculley

The strong US dollar and higher interest rates have dominated the conversation this year.

But the direction of the US Dollar Index $DXY has changed, breaking its year-to-date trendline earlier this month. 

Will interest rates follow?

Not yet! So far, the uptrend remains intact for the five-, 10-, and 30-year yields. We have to give these trends the benefit of the doubt, for now.

Despite their persistence, it seems more a matter of when not if rates do eventually roll over.

Based on information from the US bond market and developed-market European yields, it could happen sooner than you might expect.

Let’s break it down.

First, we can’t dismiss the middle-long end of the curve holding above year-to-date trendlines.

Our outlook remains higher for these yields as long as their trend lines hold. If they...

From the Desk of Ian Culley @Ianculley

Bonds are bouncing off key levels of potential support.

For some, it’s a former low. And for others, it’s a downside extension level. Regardless, we can all rejoice that bonds have stopped falling.

That doesn’t mean we’re rushing out to buy Treasuries. Instead, it signals a constructive start to a potential bottoming process for the bond market and relief from downside volatility.

Let’s check out the charts!

First up is the long-duration Zero Coupon ETF $ZROZ:

ZROZ has rebounded above its former 2014 lows, posting a potential failed breakdown. Risks are to the upside above 82 with potential resistance at the shelf of former lows around 100.

It’s a similar story for the Treasury Bond ETF $TLT:

T-bonds reclaimed their former 2014 lows on Wednesday. As long as TLT holds above 101.50, our tactical...

From the Desk of Ian Culley @Ianculley

Don’t take your eyes off the US dollar and interest rates!

I know it’s been a long year, but we’re finally witnessing early signs of potential trend reversals. The breakdown in the dollar last week confirmed the mounting evidence suggesting the USD has reached its peak.

Now, will interest rates follow?

Check out the dual pane chart of the US dollar index $DXY and the 30-year yield $TYX:

They look almost identical. The recent breakdown in the dollar marks the lone flaw between the two, raising the question…

Will the strong relationship between rates and the dollar hold?

I won’t pretend to know where rates are headed. But if the dollar and rates remain on similar paths, my money is on declining yields at the longer end of the curve.

A falling 30-year yield also makes sense based on a...

From the Desk of Ian Culley @Ianculley

It’s been a lonely rise for interest rates.

The stocks and commodities that tend to accompany rising yields haven’t kept pace since early spring. Rates across the curve have accelerated higher, leaving these risk assets in the dust. 

But the seasons have changed – and the dust has settled. 

Cyclical value sectors have found their footing in recent months. Now, they’re playing catch-up.

One of the strongest market themes in recent weeks has been the reemergence of value over growth.

Check out the overlay chart of the 10-year US Treasury yield $TNX and small-cap value $IWN versus small-cap growth $IWO:

The 63-day correlation study in the lower pane highlights the strong relationship between these two charts. 

At a glance, they appear quite similar. But their positive correlation began to erode in late March, reaching negative territory by...

From the Desk of Ian Culley @Ianculley

Bonds are an absolute dumpster fire. 

Everyone knows fixed income is having one of its worst years on record. And, from the looks of it, we’ll all be dragging our Christmas trees to the curb before US Treasuries stage a miraculous comeback. 

Don’t get me wrong. I believe these safe haven assets will dig in and catch higher –  eventually. There’s just no sign of it happening any time soon.

Instead of focusing on the disappointing performance of bonds, let’s turn our attention to its relative trends against other major asset classes – stocks and commodities.

Here’s the commodities versus bonds ratio using the CRB Commodity Index and the 30-year Treasury bond futures:

The commodity/bond ratio completed a bearish to bullish trend reversal last year after violating a decade-long downtrend.

This major intermarket shift caught many off-guard, as 12 years of underperformance led the industry to...

From the Desk of Ian Culley @Ianculley

Bonds have stopped falling across the board!

That doesn’t mean it’s time to go all in. Tactically, it’s difficult to get behind this week’s near-term strength. 

Right now, we’re looking at just a few days of bullish price action. And where do we define our risk?

We have to know where we’re right and where we're wrong before we get involved in any investment. 

Thankfully, high-yield bonds answer this all-important question.

Check out the daily chart of the High-Yield Bond ETF $HYG:

Unlike most bonds, HYG has formed a small reversal formation.

We like the looks of this 4-week inverted head-and-shoulders on the HYG chart. Momentum is improving. And the bulls are reclaiming a key level of former support turned resistance marked by its...

From the Desk of Ian Culley @Ianculley

Don’t catch falling knives!

It sounds simple enough. But in reality, traders continue to lose fingers as they reach for downtrending assets.

Diving after downtrends isn’t one of my many afflictions. But I do have a theory…

Traders and investors don’t realize they're catching a falling knife in the moment. They believe they’re bargain-hunting.

So if you’re one of the many investors out there mending fresh wounds this week, I want to make one thing clear…

Bonds are a falling knife.

Check out the chart of the 30-year T-bond:

Do you really want to buy this chart?

Sure, the downtrend is stretched and ripe for some mean reversion. But as long as it’s below 127’23 we’re short with a target of 116. 

It’s the same story with $TLT:

I can’t buy a chart that’s breaking down to fresh 8-year lows. It doesn’t make sense to me...