Stanley Druckenmiller, illustrious hedge fund manager, earlier this year referred to the U.S. interest rate as “the most important price in the most important economy in the world.” Ahead of the monthly payrolls report today, the 10 year yield in the U.S. is at its highest level since mid-2011. The chart since 2009:
In rare fashion, the bond yield in the U.S. is actually still lower than it was for much of 2009 to mid-2011. I say rare fashion because in that period, risk appetite in U.S. financial markets has dramatically increased. Of course, the rate’s low level is part and parcel of the Fed’s QE program.
In 2013 though, perhaps the most dramatic move in U.S. markets is the relative price action of stocks to bonds. The ratio of TLT vs. SPY, which is one broad way of assessing how the comparative performance of the bond market vs. the stock market has behaved, hit new 5 year lows yesterday, and is approaching its 10 year lows:
Asset allocators have been especially better off in 2013 being underweight bonds and overweight stocks in the U.S. The ratio has moved from 0.85 to 0.62 so far in 2013, indicating the massive performance difference between the two asset classes in just 7 months.
In the short run though, the ratio shows signs of becoming stretched. Since the start of 2012, there have been 5 instances, including today, when the RSI of the ratio has moved into oversold territory (below a 30 reading):
I’ve circled each of those instances in the lower panel. The red circles indicate the 3 previous instances where stocks had topped within a couple weeks of each reading, while the green circle indicates the one instance where stocks continued higher. I’ve circled the current instance in black as we obviously don’t know whether stocks move higher or lower from here in the coming weeks. But the rapid move lower in this ratio has no doubt changed the relative attractiveness of bonds versus stocks. Whether asset allocators act on that shift is the elephant in the room over the next few months.