It’s age-old conventional wisdom.  Buy stocks, sell bonds, vice versa, risk-on vs risk-off.  One of the most common questions I receive over the years (or comments, in the frequent cases where people email me telling me what’s about to happen in the market) is some iteration of “why are bonds doing this if stocks are saying they should do this?”  Of course if it’s phrased as a comment, people are telling me that bonds will do one thing because stocks are doing another (or stocks will be forced to follow the suggestion of bonds).

These questions (and comments) exist because there are plenty of past examples that support them.  There are even present examples if we zoom in to a narrow enough timeline.  But the farther we zoom out, the more the conventional wisdom falls apart.  Consider the last 24 hours of trading, where the stock/bond correlation is in almost full support of conventional wisdom.

20200818 open3.png

Based on this correlation, we should be very worried that an ongoing surge in stocks is going to pull bond yields relentlessly higher.  After all, aren’t the talking heads talking about all-time highs in stocks?  A ha!  There’s a clue!  Even if we do get caught up in the conventional wisdom, most of us are aware of the fact that bond yields are not at or anywhere near all-time highs.  Quite the opposite actually.  Pulling on that thread ultimately leads to charts like this:

20200818 open4.png

And charts like that mean there are going to be plenty of intermediate examples of movement like the seemingly paradoxical post-covid dynamic.

20200818 open2.png

Long story short, no… bonds don’t particularly care about all-time highs in stocks.  Of course details matter though, and in the current case, one of the most important details is Fed stimulus.  The goal of stimulus is to create “cheap money” in order to promote liquidity and stimulate the economy.   It’s chief mechanism of action is massive purchases of bonds.  Bottom line: “stimulating the economy” is good for stocks and “buying bonds” is good for bonds–a rising tide that lifts all ships.  Granted, there are other non-bond-related cases to be made for a return to all-time highs in stocks, but the stimulus angle is the easiest to grasp, the most logical, and the only one that is directly connected to our daily topics of conversation here on MBS Live.

As for the day ahead, we’ll continue to watch (and hope) for yields to confirm they’re done with this recent bout of negative momentum after breaking out of the extended downtrend last week.  Today is the day that momentum metrics would confirm that reversal, provided we can maintain a modest amount of gains.  Nonetheless, I would like to see yields show some interest in moving just a bit lower before having too much confidence in last week’s high yields marking the top of the range for now.  Getting back to .58 would be ideal.

20200818 open.png


MBS Pricing Snapshot

Pricing shown below is delayed, please note the timestamp at the bottom. Real time pricing is available via MBS Live.

MBS

UMBS 2.0

103-04 : +0-04

Treasuries

10 YR

0.6752 : -0.0078

Pricing as of 8/18/20 9:27AMEST

Tomorrow’s Economic Calendar

Time Event Period Forecast Prior
Tuesday, Aug 18
8:30 House starts mm: change (%) Jul 17.3
8:30 Build permits: change mm (%) Jul 3.5
8:30 Housing starts number mm (ml) Jul 1.240 1.186
8:30 Building permits: number (ml) Jul 1.320 1.258

By Matthew Graham , dated 2020-08-18 09:29:24

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Courtesy of Mortgage News Daily

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