US Corporate Bonds (8-10Yrs) Vs US Treasury Bonds (20Yrs) Rising Ratio = Corporates Outperforming Treasuries
BLUE BARS = THE S&P500 STOCK MARKET INDEX
When Corporates underperform Treasuries and the ratio declines on this chart (black bars), USUALLY the stock market has gone down at the same time (NOTE THE BLUE BARS at the same time as the RED HIGHLIGHTED AREAS on the ratio chart). Treasuries in the last year have rocketed higher and is very likely from Central Banks both here in the US and around the world buying up US Treasuries (and the US Dollar).
HYG looks poised to outperform TLT to the tune of 10%-30% over the next year.
(Note: the MACD is a measure of the 12 and 26 week moving average. When the 12-week average is above the 26-week average, the "trend" can be considered "UP" and vice-versa. You can see the long trend down in the MACD that has now turned back UP, possibly signifying a change in "trend" from down to up.)
Tim
April 2, 2015 11:23AM EST 68.97 Ratio of (HYG*100/TLT). HYG is 90.48 +0.09, TLT is 131.21 -0.92 today
Dagangan ditutup: sasaran tercapai
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HYG/TLT rallied from 69.23 to 77.23 for more than a 10% move in short order and has since come unglued and has melted down to new lows.
Komen
timwest
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This trade is still working well - the current pullback is likely another entry after a nice move of nearly a 10% gain in very short order.
timwest
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This idea is working VERY WELL right off the get-go. TLT is dropping and generating the return for this trade. If you are short TLT, you will be paying the dividends, which will provide an artificial return to the ratio, but you will receive HYG dividends which will make the return drop by over 2% over the course of a year. The net-net is that you will earn a positive carry from holding this position since HYG has a much higher dividend than TLT. If you are short TLT, you PAY the dividend each month.
SPYderCrusher
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Definitely love this type of analysis.
... I have some points to add. One point is that corporates have underperformed both Muni's and Treasuries for two years running now. That should factor in bec even though the relationship you've pointed out has held historically, it's unclear how exactly it will go in a zero rate environment. Pardon for linking out here here is the data on Muni's outperforming Corps + Treasuries:
I made your chart mine just changed the ETF to Muni Bonds:
Now you can see the relationship is actually flipped -- Though this muni bond fund only has data from the last cycle, the relative outperformance is associated with more stock market rally:
some ideas to add to this:
Yield Curve -- if the spread widens, historically, has been bearish for stocks as it suggests expanding risk premium, but the last time the curve widened, stocks rallied:
More ideas:
- Raise has been fairly well telegraphed....so far market reaction seems muted?
- Other broad based.....dislocations lets call them have (FX, Euro, Oil) don't seem to have triggered a disdain for risk appetite, so wonder what the next major catalyst will be.
alex.a
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This is amazing ~
TomProTrader
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SPY and HYG are acting differently to how they historically have this time. It's unusual. Not really used to it.
By the way, thanks for reminding me that trading is closed tomorrow. I forget every single year about the same occasion.
IvanLabrie
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Amazing!
timwest
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I don't think it's amazing Ivan - but thanks.
IvanLabrie
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Your work...not the possible outcome.
jangseohee
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TIm, HYG is known as one of the JUNK bond risk on
if it wil outperform relative to TLT, does it mean SPX will go up too? seems like HYG and SPX is highly related
timwest
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Yes, HYG is the "junk bond" etf or the "risk on" trade. I started making the chart because I was looking at buying HYG because I traded out of my TLT. I thought I'd just see where it was in the historical range and it kept developing from there. I've been reading that Doug Kass is making a very bearish case for TLT going forward, so the returns from this strategy may come from TLT declining more than HYG. So, since it is a ratio trade, you'd have to be long HYG and short TLT to make money from the movement in ratio of 25% as depicted. HYG goes ex-dividend at the start of each month and totals roughly 5% whereas TLT has a much lower payout rate of only 2.5%, so there is a positive carry of 2.5% from this trade assuming you don't have to pay to borrow TLT.
HYG and SPY historically have been useful to analyze to look for clues. Lately though, that hasn't been the case. I think it is from intervention, but I have no idea when the market will respond to this setup.