The iShares 20+ Year Treasury Bond ETF (TLT) rallied to its highest level of 2013 on Wednesday. Continued strength in U.S. government debt signals investors are worried about deflation and the health of the economy.
Yields on the 10-year Treasury note were testing 1.6% before the Federal Reserve announcement and as investors reacted to weak economic data in the U.S. and China.
TLT, the Treasury ETF, has quickly rallied to above $124 a share after bottoming out at $115 in March. The move higher suggests investors are favoring safe havens even though U.S. stocks are also rising. Technical analysts have pointed out the divergence in stocks and Treasury yields as a potential warning sign for equity bulls. [Growth Concerns Lift Treasury ETFs]
“In general, as the stock market rises, so too does the 10-year yield, and vice versa. There are a few good reasons for why this correlation should hold, one being rising T-bond yields infer the economy is strengthening. Typically low government bond yields are due in large part to the Fed keeping rates low for the benefit of an anemic or ailing economy,” according to the Charts etc. blog.
“Signs of economic growth are going to make it less necessary for the Fed to maintain such low rates, in effect framing rising yields as a bullish indication for equities. Another reason rising yields are bullish for the stock market is very simple: it implies money is getting re-allocated out of bonds (yields rise) and most likely into equities,” it adds.
Therefore, the 10-year yield “is not confirming this recent rally in the stock market, a potential red-flag.”
iShares 20+ Year Treasury Bond
Full disclosure: Tom Lydon’s clients own TLT.