From the Desk of Ian Culley @IanCulley

"You can’t pay me enough to buy US Treasuries."

That’s the message from the bond market.

The result: a persistent rise in interest rates.

Classic intermarket ratios – copper versus gold, regional banks $KRE versus REITs $IYR, and the Russell 2000 $IWM versus the S&P 500 $SPY – all point to lower yields.

This has been going on for months. Some may argue that these ratios are broken or no longer carry significant insight into the direction of rates.

It may be true that the strong relationship between the above ratios and interest rates has indeed decoupled. 

But it’s not solely relative trends hinting at declining yields.

The stocks that benefit the most from a rising rate environment also look terrible on absolute terms…

The ProShares Equities for Rising Rates ETF $EQRR tells the story:

From the Desk of Ian Culley @IanCulley

Tech stocks don’t care about the manufactured debt limit crisis. Nor are they bothered by the increasing probability of a rate hike next month.

Growth stocks seem concerned with only one thing – printing fresh highs.

The Tech sector ETF $XLK posted new 52-week highs yesterday. And the Communications ETF $XLC rallied within reach after taking out its Aug. ‘22 pivot highs. 

So where does that leave bonds and other long-duration assets? 

If these base breakouts across growth sectors hold, I imagine bonds have some serious catching up to do…

Why?

Growth stocks tend to trend with bonds since they’re both long-duration assets. Changes in interest rates directly impact US Treasuries and affect tech stocks more than other equities.

Check out the tight relationship between the Long-Term Treasury ETF $TLT and the Technology sector $XLK:

Bonds are catching a bid as a risk-off tone plays across the market. 

Aside from intraday knee-jerks in price, not much has changed. Rates and the US dollar remain range-bound. US Treasuries have yet to provide a definitive buy signal.

And the S&P 500 continues to contend with overhead supply at the 4,200 level.

It’s a chop fest.

But one data point has changed in recent sessions – the probability of a rate cut or a rate hike next month based on the fed funds futures…

Check out last Thursday’s probabilities after the FOMC raised the overnight rate by 25 basis points:

The futures market was pricing an 8.9% chance of a rate cut in June with a 91.1% chance of a pause in the hiking cycle.

From the Desk of Ian Culley @IanCulley

Fed Chair Jerome Powell has spoken…

And not much has changed. Rates churn sideways as bonds carve out tradeable lows. 

The market is simply playing a new verse of the same old song.

But the tempo picks up as another antagonist enters the scene – regional banks!

Banks are the market’s weakest link, especially the smaller regional banks. They simply can’t stop falling.

To be clear: This isn’t about possible contagion risks or the next leg lower in the S&P 500. I’m more interested in the implications for interest rates.

The banking sector has captured every investor’s full attention. And regional banks have hinted at underlying problems with the rising rate environment for more than a year.

Check out the dual-pane chart of the Regional Bank ETF $KRE versus the REITs ETF $IYR ratio and the US 10-year yield $TNX:

From the Desk of Ian Culley @IanCulley

What caught my attention following the SVB collapse wasn’t the headlines so much as how the markets handled the news and the stress that followed.

It’s difficult to find the silver lining of one of the largest bank failures since the financial crisis. But I’m more of a glass-half-full kind of guy.

Despite the relentless barrage of negative headlines, it’s undeniable that risks have been contained, and the markets have weathered the storm – at least for now.

Investors ditched equities and ran to the safety of US Treasury bonds as the saga unfolded. It was like the good old days when stocks were risk assets, and bonds acted like – well, bonds!

Now that the dust has settled, I believe the renewed classic intermarket relationship between stocks and bonds and the familiar patterns of risk-on/risk-off behavior bodes well for the overall market.

Especially when you consider easing volatility…

Here’s an overlay chart of the Bond Volatility Index $MOVE and the S&P 500 Volatility Index $VIX:

From the Desk of Ian Culley @IanCulley

Despite another CPI report and the latest job numbers reflecting easing inflationary pressure, markets are a mess!

Indecision and uncertainty are running high. Investors simply aren't able to get a read on the economy and the Fed's next step. 

I don’t blame them.

If you’re focusing on the Fed comments du jour or lagging economic data that will likely be revised in the future, confusion and pain are the higher probability outcomes.

That’s why we study price.

Let’s check in on the charts to clear things up…

Here’s the US 10-year breakeven inflation rate:

From the Desk of Ian Culley @IanCulley

US Treasury futures are breaking out.

The 30-, 10-, and 5-year contracts are trading above our risk levels. And the bond ETFs we covered a couple of weeks ago are also flashing buy signals.

The bond market is sending a well-advertised message to all investors…

It’s time to buy bonds.

Let's review one of the most liquid treasury ETFs, $TLT.

Zooming out on the weekly chart of the Treasury bond ETF TLT… 

We have a potential failed breakdown below the former 2014 lows, followed by a tight, multi-month consolidation.

From the Desk of Ian Culley @IanCulley

Bonds are taking a breather as stocks recover.

Bond market volatility is cooling off as the banking collapses and the March Fed meeting fade from the front page. 

And it appears the volatility has left big unresolved bases in US Treasuries in its wake…

Let’s dive in!

Check out the US 30-year T-Bond futures carving out a multi-month reversal pattern:

If and when it breaks above 132’18, I’m long with an upside objective of 143’00. Simple!

It’s the most attractive setup due to the bullish momentum regime and clean breakout level – two attributes short-duration bonds lack.

From the Desk of Ian Culley @IanCulley

The Federal Reserve handed down a 25-basis-point rate increase on Wednesday.

And Fed Chair Jerome Powell implied an impending pause in the hiking cycle.

You know what this means...

It’s time to buy the four "Bs" – Bonds, Bitcoin, Big-Tech, and Bullion.

JC and Strazza talked about it on Pardon the Price Action earlier this week.

Today, I’ll highlight bonds with a couple key levels to trade against as we add these assets to our portfolios.

First up is the 7-10 Year US Treasury ETF $IEF:

It’s not there yet. But if and when IEF reclaims the critical shelf of former lows at approximately 100, we’re long!

From the Desk of Steve Strazza @Sstrazza

Markets have been on the ropes since late last week when a Silicon Valley Bank press release sparked a run on regional banks. 

As Wall Street scrambles to reprice the financial sector -- for what, up until last week, were unforeseen risks -- selling pressure and panic is spreading to Europe and other parts of the world.

Regulators are taking action. And the Fed is taking notice as expectations for future rate hikes plummet.

While Bitcoin and tech stocks have performed exceptionally well through the volatility, cyclical stocks and commodities have been hit hard, with energy and the CRB Index breaking to new lows this week.

What are we to make of all this? Should we be concerned?

Is the regional banking crisis a contained event, or is it about to send reverberations through the broader market and economy? 

Whenever we have questions like these, the first place we want to look is the bond market. 

Any signs of stress tend to show up there first.

It's the weekly bond edition of What the FICC?

The Silicon Valley Bank $SIVB collapse dominates the week's headlines.

While risks appear isolated for now, unlike in 2008, the next chart reveals a storm brewing beneath the surface...

From the Desk of Ian Culley @IanCulley

US bank stocks big and small took a beating Thursday, with the Bank ETF $KBE posting its largest single-day decline since 2020.

The steep sell-off came on the heels of Silicon Valley Bank’s $SIVB Wednesday announcement of a $1.8B loss, mainly due to accepting unrealized losses in US Treasuries.

Based on SIVB’s acute exposure to the tech industry, you can argue larger banks with more diversified portfolios and clients don’t carry the same risk. And they don’t.

Regardless, the next chart reveals a storm brewing beneath the surface...

Check out bank stocks (KBE inverted) overlaid with the US Treasury 2s10s spread:

I inverted KBE to highlight the strong relationship between banks and the yield curve. The two lines look almost identical over longer timeframes.