We trust the bond market around here.

I don't have a lot of faith in people, or media or economists. But bonds are something we certainly take seriously.

There's no bullshit with them.

The biggest players in the world have no choice but to be intimately involved in fixed income markets. So if you're curious which way the pendulum is swinging, you'll be able to see it in bonds.

Here's a quick look at US Interest Rates making new highs - from the 1yr to 10yr yields these are going towards the upper right:

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Downside pressure on long-duration rates and a flattening yield curve was the story of the bond market for the latter part of 2021. 

But we started to see signs that downside risks were easing in the final weeks of December. The 10- and 30-year yields made a nice kick save after undercutting their summer lows, and high yield bonds $HYG began to outperform safer alternatives like the Treasury bond ETF $IEI.

It seemed like the bond market was heading in the right direction – except for Treasury spreads. The 2s/10s spread was the missing piece of the puzzle, continuing to push toward new 52-week lows… 

Until now!

Only a couple of trading sessions into the new year, the bond market is providing plenty of fireworks. Rates are jumping higher across the curve, and critical treasury spreads such as 2s/10s, are following higher: 

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

With the exception of US large-caps, the market remains range-bound for most risk assets. At the same time, most defensive assets are failing to catch any meaningful bid.

Gold is still chopping around in the middle of its year-to-date range. Bonds continue to trend sideways or lower. The Japanese yen recently hit its lowest level since 2017. 

And while the defensive sectors recently made multi-month highs versus the broader market, they're still trading near 20-year lows on a relative basis.

These are the kinds of assets we expect to catch a bid in an environment where investors are fleeing for safety and positioning defensively. But we’re just not seeing that.

At the same time, we haven’t seen many definitive signals supporting a more risk-on tone… until now!

While our risk-appetite ratios remain a mixed bag and most are simply range-bound, we just got a meaningful upside resolution in the High Yield versus Treasuries ratio.

Wall Street sell side analysts are coming out with their 2022 forecasts.

And we all know how accurate those tend to be ;)

In the latest float of the bear parade, wall street's sell side analysts are putting out some of the most bearish forecasts in recent memory.

From the WSJ,

And we already know that Individual investors (AAII) and Financial Advisors (II) are much more bearish going into 2022 than they were over the prior two years.

It's always fun having Paul Ciana on the podcast. You guys familiar with the show have already heard some our conversations over the years. They're always insightful, and he always gets me thinking.

While here at Allstarcharts.com we approach the world through the lens of an equities investor, and use other asset classes as a supplement, Paul does the exact opposite. His days both begin and end with the study of fixed-income markets, commodities, and currencies. Paul is the Chief Global FICC Technical Strategist at Bank of America.

In this episode, we dive right into it starting with the US dollar, gold, crude oil, and the most important currency crosses for stock market investors to focus on.

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Our focus has been on US Treasury yields in recent months – and for good reason. 

The 30-year yield recently undercut its summer lows, and the 10-year yield briefly lost the critical 1.40 level. Both have since recovered. But these crucial rates remain stuck in the same messy ranges that have defined most of 2021. 

Given the lack of decisive action in domestic yields, we think it's a good time to check in on the overseas bond markets in hopes of gleaning some insight into the potential direction of yields outside the US.

In today’s post, we’re going to switch things up and take a look at the 10-year yields from other major developed countries.

It's not a secret around here that market breadth started to deteriorate in February.

If you recall, that's when everyone had a SPAC.

The IPO index peaked, ARK Funds, Biotech, the new highs list, etc all stopped going up.

That was over 10 months ago.

But more recently, market breadth is getting all the attention. Everyone is a breadth expert now, you notice?

I'm even getting software developers asking me about my breadth analysis wishlist so they can build it for me. Which I love and I certainly appreciate, but just goes to show you another sign of the times.

The way I see it, if you're trying to get defensive NOW because of breadth deterioration, I think you might be looking at it completely wrong.

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

It was only a month ago that we discussed the TIPS versus Treasuries ratio hitting its highest level since 2013 as investors prepared for rising inflation.

Fast-forward to today, and the inflationary backdrop looks very different.

Inflation breakeven and forward expectation rates have rolled over aggressively since the middle of November. This is illustrated by the TIP/IEF ratio, which recently undercut its May highs. Combine this action with the lack of follow-through on last week’s kick save from the 30-year yield, and the prospects of rates rising across the curve aren’t looking too hot.

But what does that mean for risk assets?

For starters, commodities will miss out on all the usual tailwinds that come with inflationary pressure. Let’s take a look at a chart that highlights that relationship.

From the desk of Steve Strazza @Sstrazza

On Monday night we held our December Monthly Conference Call, which Premium Members can access and rewatch here.

In this post, we’ll do our best to summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each.

Let’s get right into it!

This is the video recording of the December 2021 Mid-month Conference Call.

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

The recent risk-off action came to a head last week, with commodities, stocks, and interest rates all violating key support levels. 

We saw a brief flight to safety, as long-term treasury bonds $TLT broke out to their highest level since early January.

Yes, money was flowing into bonds, which is not a good look for stocks and commodities.

Bottom line, there was a lot of damage done to the primary uptrend in a very short time. Market participants needed to come out and repair the damage ASAP.

In the handful of trading sessions since the selling stopped, bulls have managed to claw back much of the losses from last week.

Buyers needed to quickly step up to the plate. And that’s exactly what we’re seeing right now, as stocks and other risk assets are rebounding aggressively off the recent lows.

As for bonds, the breakout in TLT failed, and the 10-year and 30-year both snapped back above critical levels.