The Yellow Brick Road

Back in 2007 I was writing that during the Kondratieff Spring, Summer and Autumn Treasury bonds and stocks are trading generally in the same direction, with bonds leading. During the Winter they are trading in opposite direction.

At this chart the black line is 10 year bond price and red line is S&P. You can observe that indeed the inverse relationship mostly holds, because we are in Winter.

However, which is more interesting, the medium-term fluctuations still follow an old rule, i.e. bonds slightly lead and stocks follow.

For each peak in bonds (black line) the peak in stocks follow few weeks to few months later.

The reason is simple. While the bonds are in the bull market each sell-off creates a buying opportunity. People sell stocks to move money into bonds.

But probably a bigger reason is that every decline in bonds price makes short-term borrowing more expensive and corporations have to slow-down the inventories build-up to keep costs at check. Any reduction in inventories creates a chain reaction through all stages of production and sale thus making the fundamental watchers to worry. That’s it.

Another example. I’m too lazy to plot it, but the relationship between fluctuations of the outstanding commercial paper and bond prices must be similar. Higher yields must trigger the reduction of CP, and CP is used for inventories, payments to suppliers, short-term commercial credit and stuff like that. Commercial paper is declining all April, while treasuries are declining sinse February, so there is a lag of 5-6 weeks.