After multiple tests (and failures) to breakout through what I consider intermediate term resistance at 2.84% (see chart), yields on 10-year US Treasury Bonds broke out to the upside this week. The US Bond market has gone from shaking in my macro model, to breaking. This is important.
While it’s hard to take a step back from the vacuum associated with the SP500 breaking down to lower lows into week’s end, we must. These global macro factors that run across asset classes are as interconnected as I have ever seen. As yields on US bonds shoot higher, US Equities (at a price) become more attractive. That’s just the math.
Interestingly, both gold and volatility (VIX) agreed with this newly issued investment Trend. Gold, alongside the US Dollar and US Treasuries, has been a beneficiary of the safety trade in 2009, but gold closed down -5.5% on the week (we were short it for most of the move down, then covered into week’s end and went long again). Meanwhile, US equity volatility (as measured by the VIX) dropped -6% on the week, despite the SP500 making new lows.
How can volatility and gold prices dampen as US Equities weaken? Maybe there’s a big asset allocation shift that’s setting up to take hold here... and one that no one is ALLOWED to be long, right when it makes the most sense… long US Equities?
I, for one, am short US Treasuries via the SHY etf (1-3-year Treasuries), and as I sit here on Sunday morning thinking this through, I am seriously contemplating why I don’t own more exposure to US Equities…
As the macro facts and prices embedded within them change, I will… and for now, at a bare minimum, you don’t want to be long this Bond Breakdown!
Best of luck out there this week,
Keith R. McCullough
CEO / Chief Investment Officer