It was an enjoyable day in stocks, but a more interesting day in rates, with the 10-year rate, based on my last check, soaring by 20 bps to 4.2%. The 10-year rate has been positively correlated with the equity market for some time, and I wonder how long this positive correlation will last. Once rising rates are seen as a sign of trouble, that correlation will break and invert.
The real fun probably starts today, when the stock-bond correlation will be put to the test with the 3-year Treasury auction. You will want to pay the most attention to the spread between the high yield rate, the when-issued rate, and the indirect acceptance rate. If the HY rate is higher than the WI rate and the indirect acceptance is low, that will be a bad sign.
The true test is on Wednesday when the 10-year treasury auction will be held, and then on Thursday, when the 30-year auction will be held. Indirect acceptance will tell us whether foreign buyers have stopped buying US bonds.
More importantly, the 10-year rate has successfully tested and bounced off the 3.9% level two times. The most unexpected move would be for the 10-year to form an inverse head-and-shoulders now and continue to move higher.
Of course, all of this hinges on the US dollar, because if it weakens further, it will be a sign of the capital outflows. I’m not sure, but the pattern on the dollar doesn’t look complete at this point, meaning I think it can still fall further, back to around 100.
To be continued…