Watching the bond market is an excellent way to monitor risk within the capital markets. It's often said that the bond traders are the 'smart money' and are often right when they have bond yields stray from equity price action. A great example of this was back in early 2011 when the 10-year Treasury yield topped out just over 3.7% while equities continued to rally and put in a new high while the yield had fallen to 3.58%. Bond traders were bidding up the price of Treasury's at the same time as equity traders were throwing money at stocks. In the end, the bond yield's won out with equities eventually correcting a few months later.
This morning we are seeing a gap down in the 10-year yield, breaking below 1.9% and approaching the late-February low of 1.84%. Since Mid-March the Treasury yield has been sliding lower, all while equities threaten to hit new highs. With this morning's gap we see yield breaking below a rising trend line which helped create a small symmetrical triangle.
Looking at the Relative Strength Index we can see that momentum has been in a mini 'bull market' since the July low. Bond bears have been unable to get the 10-year yield's RSI indicator to drop into a traditionally oversold environment, with each period of weakness bottoming in the 40 to 35 range. Looking back when the yield broke above 2.05% earlier this month, above the previous high in February, momentum was unable to reach 70, a possible sign that momentum is waning and makes the trend line break make a little more sense. Going forward I'll be watching to see if the RSI indicator can drop below 35 and see how yield acts around the 1.84% support level. If bonds continue to rise (causing yield to keep falling) then we could potentially see weakness out of the equity markets, something to keep an eye on.
Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.