The Bond Market Should Worry Stock Investors…

The bond market is angry. And, that should worry stock investors.

The yield on the 30-year Treasury bond climbed to its highest level in nearly five months yesterday. Here’s the updated chart…

Regular readers will recall we pointed out in December that this chart was showing an “inverted Head & Shoulders” pattern. We suggested if the yield broke above the neckline of the pattern at 47.5 (4.75%) then it was likely headed to 49.5 (4.95%).

That is indeed what appears to be playing out so far.

A casual observer might look at this chart and say, “Big deal. All that has happened is long-term interest rates are back to where they were for much of last year. The stock market wasn’t so concerned about a 4.95% 30-year yield back then. There’s no reason to be too concerned about it now.”

But, let’s not forget, the last time this yield was at 4.95% the S&P 500 was at 6400.

The index closed at 6940 last Friday.

It’s also worth pointing out the recent rise in long-term interest rates is happening while the FOMC has been lowering its target on short-term interest rates. It’s happening while the Fed is engaging in “Quantitative Easing-lite” by buying $40-60 billion in Treasury securities each month. And, it’s happening while President Trump is asking Fannie Mae and Freddie Mac to buy $200 billion in mortgage-related debt.

All of those activities are designed to bring down long-term interest rates. And yet, the rates are pressing higher anyway.

Like I wrote earlier… the bond market is angry.

Rising long-term interest rates are a headwind for the stock market. While the stock market has been able to press higher, or at least mark time for the past few weeks, there is a point at which rising yields will pressure stocks.

Best regards and good trading,

Jeff Clark
Editor, Market Minute