When equity markets are rallying we can often turn to other key pieces of market data to look for signs of confirmation.
It’s often thought that the bond market leads equities at important turning points within the financial market. One way we can evaluate the sentiment within the bond market is looking at the relationship between high yield bonds and Treasury securities.
One such relationship that we can view is HYG and TLT. When stocks are advancing we commonly see HYG (a high yield ETF) outperformance TLT (a 20+ Year Treasury ETF). When stocks bottomed on February we saw HYG begin to lead TLT, however that’s changed here recently. While stocks have remained relatively strong, the ratio between these two bond ETFs peaked on March 11th – a potential sign that bond traders are no longer as bullish as their equity brethren.
While this type of analysis can be helpful in forecasting turning points within the market, it’s best used as a tool to accompany other measurements and price action rather than a stand-alone barometer. The dislocation between high yield bonds relative performance and equity trends can persist for large stretches of time, so good to simply keep this on your radar.
Thanks for reading.
The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.
Further Reading From Andrew: “Is The VIX Signaling A Return Of Market Volatility“
Twitter: @AndrewThrasher
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
