Keep your fingers crossed. Stocks are still playing a dangerous game of chicken with the bond market, but we’ve gotten a few teeny-tiny indications in the past few days that maybe, just maybe, a fatal collision can be averted.
Granted, if you’re searching for hopeful signs, you have to look well beyond the blaring headlines. (My favorite: Will the Last Person to Leave the Treasury Market Please Turn Out the Lights.) Certainly, it wasn’t encouraging to see the 10-year Treasury yield tick up to 2.9% Thursday, another two-year high.
So where are those faint “points of light”? Well, for one thing, the true long bond, the 30-Year Treasury, has begun to diverge from the 10-year, something that often happens near major bottoms for bonds. As of Thursday’s New York close, the price of the 30-year stood about three-quarters of a point above Monday’s close, while the tenner ended today’s trade well below Monday’s close.
More dramatically, corporate and municipal bonds are showing excellent relative strength versus Treasuries. See this chart, which plots the price ratio between the iShares Investment-Grade Corporate Bond ETF (LQD), which is a leading corporate-bond ETF, and the liquid long-dated 20+ Year Treasury Bond ETF (TLT). And the chart below depicts the same ratio between the most liquid municipal fund, the iShares National AMT-Free Muni Bond ETF, (MUB) and TLT.
Again, it’s normal, as the bond market carves out an important price bottom, for corporates and munis to begin outperforming Treasuries (the sector most sensitive to changes in interest rates). This is not the time to give up on your bonds!
By the same token, if bond yields can quickly back down from their current unsustainable heights, there’s a good chance the headline U.S. stock indexes will break out to new all-time highs during the fourth quarter. However, I’ve got to admit: The fixed-income arena hasn’t seen much relief yet, and until it does, the risk of an autumn “crashette” for equities still lurks in the background.
For now, your best advice is to keep your head down and stick with basic blocking and tackling. Don’t attempt a lot of razzle-dazzle with your portfolio. For example, while I’m a big believer in emerging markets for the long term, I think you’ve got plenty of time (two or three months, at least) to average into a position.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.