A funny thing happened after the Federal Reserve decided to lower short-term interest rates last month…
Long-term rates have shot higher.
Look at this chart of the CBOE 30-Year Treasury Yield Index (TYX)…
Just prior to the Fed’s decision to lower interest rates by 50 basis points on September 18, the yield on the 30-year Treasury bond was 3.93%. Today, that yield is above 4.4%.
That’s one heck of a rate increase in just one month. Though, as I explained in the video update we published prior to the Fed’s decision, it was predictable.
As a result of this rise in long-term interest rates, Treasury bond prices have dropped. For example, the iShares 20+ Year Treasury Bond ETF (TLT) has fallen nearly 10% over the past month.
And that’s another giant caution sign for the stock market.
You see, stocks and Treasury bonds typically move in the same direction. Over the past month, though, as the stock market has made new all-time highs – with the S&P 500 gaining nearly 5% – Treasury bonds have been falling hard.
This sort of divergence is notable.
One of these assets is due for an epic reversal. Either Treasury bonds need to rally to catch up with the action in stocks, or stocks are going to fall to match the action in bonds.
I’ll bet on the latter.
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The last time the financial markets faced similar conditions was back in early April. The S&P 500 had been rallying and making new highs while Treasury bond prices were falling.
The S&P 500 fell 6% over the next three weeks.
A similar move this time around would have the S&P 500 trading back down toward 5500 or so by Election Day.
Best regards and good trading,
Jeff Clark
Editor, Market Minute