KevinKlombies's Commentaries
For those in the northern regions of the northern hemisphere it is always nice to see the end of the month of January. While there will still be plenty of challenging weather conditions to deal with... at least the days are getting longer.
Pushing and pulling.
In a positive trend rising long-term yields 'push' short-term yields higher. In a negative trend falling short-term yields 'pull' long-term yields lower.
A 'push' market tends to be cyclically positive while a 'pull' market is cyclically negative. A 'push' market features money moving towards growth while a 'pull' market is more of a scramble for yield. The problem at present is that we seem to be stuck somewhere in between the two themes so until the markets figure things out we are going to have to live with the current choppy environment.
Below is a chart of 5-year Treasury yields along with an overlay of the Fed funds rate (black) and 3-month U.S. TBill yields (blue) from 2002 into 2005.
The markets shifted to a 'push' theme in 2003 as 5-year yields began to rise. Eventually the upward tilt for 30-year, 10-year, and 5-year Treasury yields worked down to 3-month TBills to the point where 3-month interest rates moved above the overnight funds rate. When this happens the Fed responds by moving the funds rate higher. The argument is that the process begins with strength in the equity markets and an upward 'push' from long-term yields.
Next is a chart of 5-year Treasury yields and the ratio between the Bank Index (BKX) and S&P 500 Index (SPX).
If a 'push' trend includes rising long-term yields and a 'pull' trend is based on falling shorter-term yields then where do things stand today? We grouched last week about the extension of the zero interest rate window by the Fed from mid-2013 to late 2014 because it supported the 'pull' side of the equation as it applies downward pressure to 5-year yields.
The chart shows that the decline to .73% for 5-year yields represents a 'pull' down to a new generational low. Ultimately, however, our view remains that strength in the equity prices of the banking shares will help to shift the trend back to a more cyclically positive 'push'.
Equity/Bond Markets
The strange thing is that after the action in the markets over the past few years we find that we are almost volatility junkies. The most difficult thing to deal with is... a prolonged period of nothing much.
Below is a chart of the U.S. 30-year T-Bond futures and the Japanese yen futures.
The TBonds and yen represent two facets of the 'head for safety' theme that has dominated the trend since at least 2007. We are used to bond market and yen price strength as investors flee one crisis after another but we are having a hard time dealing with the current range bound situation.
Our point is that if the markets have a trend it is, more or less, an absence of a trend. It feels as if things have struck a sort of balance between the reactions to good and bad news. Eventually, of course, one side will prevail but for now it really does feel as if things are stuck somewhere in between push and pull.
Next is a chart comparison between Bank of America (BAC) and the combination of the Japanese 10-year (JGB) bond futures times the Japanese yen futures.
The combination of the Japanese bond futures and yen futures began to drive upwards in mid-2007 as an offset to mounting pressures from the U.S. real estate market which, in turn, served to hamstring the banking sector.
Last is a comparison between the Chicago Housing Index futures and the Bank Index (BKX).
The point is that the markets are progressing through the recovery.... slowly. We have seen an uptick in U.S. real estate prices and a concurrent improvement in the Bank Index. Long-term U.S. and Japanese bond prices have flattened out and, as long as the Fed doesn't muddy the waters, have little reason to move to new highs. The Japanese yen is tracking with the bond market and is also holding within a flat trading range.
