US Treasuries Soar in Price

Not surprisingly, the S&P500 lost some ground last week. The bell-weather US equity index dropped about 1.2%. Volume rose somewhat over the prior week’s volume…..an indication that there was a bit of conviction behind the selling. Volatility, unsurprisingly, also jumped; the VIX index spike well over 20 during the peak selling phases of last week’s price retreat.

So technically, the S&P500 more clearly established a downturn….after two consecutive weeks during which upward momentum stalled. That said. much of last week’s price drop was driven by headline risk coming out of the UK—specifically, the looming vote to remain or exit the European Union. But by the end of last week, some of this risk had suddenly abated, and despite the continuing technical signals for more price weakness to come, the sudden headline change could overcome these shorter term (daily) technical forces. On a longer-term basis (weekly), the two-year topping formation is still clearly visible and shows no signs of ending soon. So technical traders need to remain on alert ….. for this pattern to resolve itself, which is usually some sort of meaningful correction.

In terms of US economic news, the flow was a bit lighter last week. Headline retail sales beat expectations, but once the volatile auto numbers are stripped out, the results only met expectations—not better, not worse. Producer prices, both headline and core, beat consensus estimates…..so analysts might start to worry that higher corporate costs could eat into future profits. Industrial production missed expectations, badly. Initial jobless claims also missed. On the positive side, the Empire State Manufacturing survey beat consensus estimates. The Philly Fed Business Outlook Survey also exceeded expectations. And finally, housing starts came in slightly stronger than expected.

Last week, we noted how US stock prices (going up) were diverging from US Treasury yields (going down), and how this divergence rarely lasts for long. Back then, the US 10 year Treasury was yielding in the mid 1.6% range while the S&P500 was still hovering near all-time highs. In the middle of last week, however, the US 10 year yield plunged—temporarily—all the way down to 1.51%, while once again the S&P500 was down only modestly. This dip down to 1.51% represents the lowest yield since 1.4% was touched back in 2012….or a four year low in yields. And once again, this super low yield is screaming that something is wrong in the world of investing—specifically, it’s suggesting that investors are willing to accept a muli-year low in returns just to protect their assets from severe losses.

So while the US 10 year yield did recover back up to about 1.6% by Friday’s close, it’s extremely concerning to see the S&P still near all-time highs while the 10 year yield touches four year lows.

As mentioned last week, this state of affairs cannot continue for very long—-one way or another, the two figures must converge: we must see yields go up, or the S&P go down, or some combination of the two.

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