Stocks Say Bull, Bonds Say Bear

There’s no denying that the stock market is flashing bullish signs, but what about the bond market? Shouldn’t bond prices fall and bond yields rise in a bullish equity environment?

 

Historically, when stock prices surge, bond prices fall and bond yields rise. This time around, however, stock prices are rising along with bond prices. Put another way, stock prices are surging, while bond yields are falling.

 

In the chart below, we see the price action in the S&P 500 vs. 10-year Treasury bond yields.

 

 

 

As you can see, since November 2011, stocks have been in an uptrend while bond yields have fallen. The divergence here tells us a couple of important things. First, it shows us that money is flowing into both stocks and bonds in search of something more than the yield offered by cash. Thank Federal Reserve Chairman Ben Benanke and his colleagues for the fact that cash is paying virtually nothing, as his near-zero interest rate policy is partly responsible for pushing investors into riskier assets in the quest for a decent return on their money.

 

The second thing the rise in stocks and the dip in bond yields tells us is that stocks are screaming bull, while bonds are screaming bear. That’s because when things get dicey, money usually flows away from equities and into the relative safety of Treasury bonds. That bond buying pushes yields lower.

 

Something has to give here, as stock investors and bond investors aren’t likely to continue betting on a divergent path for much longer. Which way will things go? Well, I think you know the camp where I’ve pitched my tent.