TLT made a new all-time high intraday today. The upward march of Treasury bonds over the last year has been a sight to behold. As I have said before, I view the FX and Treasury markets as the leaders, and the stock market as the laggard. And the bond market is indicating serious concern. All-time highs level of concern. It’s another reason for my increasing short bias.
I can hear the counterarguments about QE artificially inflating bond prices. But the bond rally is not a purely U.S. phenomenon. The Fed is not buying German, Swiss, or French bonds. Throughout the world, rates are inching lower, and to me, it’s the ultimate sign that the largest investors across the globe are more worried about return OF principal rather than return ON principal.
So I got curious. What have been the previous instances when TLT made a 5-year high (I use TLT because it’s an easily observable proxy)? Here is the chart over the last 10 years, with new 5-year high weeks circled in red:
In 2003, the bonds actually had one last rally after the market had already bottomed in March 2003, and that was that. TLT did not breach that 2003 high until January 2008, which was after a 20% drop in the stock market over a 3 month period that marked a short-term low. The January 2008 level was breached in Sept 2008, and then exploded higher in Nov 2008, before selling back off and remaining relatively subdued until mid-2011.
That is important information as QE3 is attributed to the recent bond rally. During both QE1 and QE2, bonds did not rally as a result of Fed purchases. Rather, bonds had their real large rally in 2011 after QE2 had already ended, and it furthers my point that the main reason for bond strength is investor skittishness.
TLT made a new high during the weakness in fall 2011, moving higher in lock step with stocks moving lower, before eventually selling off a bit at the start of 2012 as stocks rallied again. Since then though, TLT has made a new high at the start of June, and then another new high today, even as stocks have shown resilience. New highs in TLT has either marked a short-term bottom for stocks, or a coming selloff, and I think today’s new high is a case of the latter. Complacency continues to reign in the stock market, while the larger Treasury bond market is panicking. I continue to believe that bonds are right.