Fixed Income Bonds Surges on Stock Market Pullback

By: Donald_W_Dony

Bond prices have generally moved in the opposite direction to stock indexes in the short term. The recent correction in the S&P 500 has seen fixed income prices advance across the curve. But this recent movement in bonds only tells part of the story.

Currently 5-year to long 30-year US bonds have risen in response to the pullback in equities (Chart 1). This short term jump in value is anticipated to continue throughout most of April as stocks have an expected low near the end of this month.

Longer term, bonds yields show no signs of reversing their ongoing decline. Over the past 20 years, the 10-year US Treasury Note yield has slide from 8% in 1994 to the present 2%. Though yields have sustained periods of level returns, the primary trend still appears to be lower in the coming years (Chart 2).

Only an advance above 4.5% would reverse this pattern.

Bottom line: US bond yields should see some mild strength in 2012 as equity markets push higher. The short term correlation between the S&P 500 and fixed income rates is expected to be positive for yields this year.

The longer term outlook for rates remains slightly negative with 10-year US Treasury yields pointing to below 2% in 2013.

Investment approach: With the outlook for a short term rise in bond prices this month, traders may wish to capitalize on this movement. However, the view on fixed income changes as the year progresses. Bond yields and stocks have a positive correlation and as the S&P 500 is expected to advance higher into 2012, so should yields.

Nevertheless, the longer term perspective for mid-term US yields is still for lower levels. The multi-decade evidence suggests continued weakness for bonds yields as US rates are expected to hold below 2% in 2013.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2012 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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