Paging Gordon Gekko And Bud Fox…

As we did in the ‘80s, stock traders have begun to pay attention to the bond market. But the message is quite different this time. Over the past year, bond yields rose steadily, on the idea that an economic recovery would take root. That is indeed good for stocks and less so for bonds. Since April, however, bond yields have fallen consistently while stocks continued to rise. Some of the drop in yields could have been because they overshot during the winter, some could be because the pace of economic recovery might be slower than anticipated. The mindset has flipped to the idea that economic weakness is also OK for stocks – at least growth stocks – because the Fed will keep the liquidity flowing. Heads, I win; tails, I also win. Remember, equity market momentum is a tough thing to fight.

1 Year Chart, 10-Year Treasury Yields (white) vs. S&P 500 (SPX, blue)

(Click on image to enlarge)

1 Year Chart, 10-Year Treasury Yields (white) vs. S&P 500 (SPX, blue)

Source: Bloomberg

Bonds had a volatile morning, as yields initially plunged on a light ADP number and a lighter government issuance calendar, then jumped on comments from Fed Vice Chair Clarida. We can see a nearly 10 basis point range in the intraday chart below. Yet during these gyrations, major stock indices stayed at the lower levels seen during overnight trading:

1 Day Chart, 10-Year Treasury Yields

(Click on image to enlarge)

1 Day Chart, 10-Year Treasury Yields

Source: Bloomberg

I wish that I could say that the confluence of the ‘80s movie reference and the gyrations in bond yields could offer a meaningful signal. Sorry, I can’t. But we are approaching a tricky season for markets, one that proved to be especially treacherous in 1987 and other years. Over the next month or two, will stock markets be able to shrug off the effects of a debt ceiling limit, a Jackson Hole conference and FOMC meeting that could offer clues to changing Fed conduct, and the end of a student loan moratorium? We’ll know the answer soon enough, I suppose. In the meantime, I’ll be really glad that my cell phone fits in my pocket rather than being the size of a brick.

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Disclosure: FUTURES TRADING

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