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Bonds Are Saying Something - We Should Be Listening


  • Despite the equity market rally, long-term interest rates continue to move lower.
  • Long-term interest rates move lower when growth and inflation decline.
  • The equity market was pessimistic in December and optimistic in January yet conditions have not changed.
  • Bonds are speaking - we should listen to what they are saying.
  • A comprehensive analysis of Treasury rates.
  • Looking for more? I update all of my investing ideas and strategies to members of EPB Macro Research. Start your free trial today »

Bonds Are Saying Something - We Should Be Listening

The euphoria that carried the stock market to an 8% gain in January all but erased the pessimism that led to one of the worst December's on record, when the S&P 500 (SPY) fell nearly 9%. Net, over the past two months, there has been a lot of chop, volatility and constantly shifting narratives that resulted in an equity market that is virtually unchanged; down about 1.5% as of this writing to be exact. While the equity market suffers from the rapidly changing sentiment, narratives and emotion that is typical in stocks, the bond market is different. Short-term bonds can whip around with the stock market which changes expectations of monetary policy from the Federal Reserve. Long-term bonds, specifically 20-30 year Treasury bonds, which are most sensitive to growth and inflation conditions, do not respond to wild emotional swings as the stock market does, and typically do not overreact in either direction. The iShares 20-30 year Treasury ETF (TLT), is the most common proxy for the long bond, carrying an effective duration of 17. There are other ETFs that carry larger effective durations, such as the Vanguard Extended Duration ETF (EDV), an effective duration of 25, but for most of the analysis in this note, we will be looking at TLT in combination with the actual Treasury interest rates.

Long-term bonds have been saying something the past few months, something the equity market has been ignoring. Typically, the long-term bonds are correct and the equity market responds at a later date when sentiment and emotions calm or reverse.

We are going to do a comprehensive study of the moves in the Treasury market starting over the summer and conclude by looking at what the action in interest rates over the last

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This article was written by

Eric Basmajian profile picture
Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Eric Basmajian is an economic cycle analyst and the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices.

Prior to EPB Macro Research, Eric worked on the buy-side of the financial sector as an analyst at Panorama Partners, a quantitative hedge fund specializing in equity derivatives. 

Eric holds a Bachelor’s degree in economics from New York University.

EPB Macro Research offers premium economic cycle research on Seeking Alpha. 

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Analyst’s Disclosure: I am/we are long TLT, EDV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I have an underweight position in SPY

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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