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Bond Yields


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arthur
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Joined: 14 May 2004
Posts: 4901

Posted: Sun May 15, 2005 3:21 pm Post subject: Bond Yields

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The two charts below are SPX and 10-year Bond Yield (TNX) daily year-to-date charts, which show a positive correlation, i.e. the S&P 500 and the 10-year bond yield generally move together. The 10-year bond auction last Wed showed strong demand, which triggered a bond rally and a stock sell-off. SPX fell below 1,160 on Wed and fell again Thu and Fri, while TNX fell to just over 41 (or 4.10%) on Fri. Also, the lower GM debt rating caused a shift from corporate to Treasury bonds.

The lower bond yields, along with the recent flattening of the yield curve, suggest the bond market is more worried about an economic slowdown than inflation. Real GDP growth fell from 4% late last year to 3% early this year, and the bond market is predicting a further slowdown. The low bond yields reflect more than an immediate "soft patch" (given that nominal interest rates are higher), a much lower or persistant decline in economic growth, and little or no concern for inflation. It seems, the bond market is expecting a skewed combination of growth and inflation than what may actually unfold.

The TNX chart shows a close at 41.21 (or 4.12%) Fri. If TNX remains at roughly the same level or falls lower, then SPX may test the low at 1,136, which is major support. However, it's more likely that SPX will continue to make higher lows, at least short-term. SPX lead TNX this year, which suggests SPX is more likely to rise. SPX major resistance is just above 1,160 (which include several levels stated before) and just above 1,175 (the current 50 day MA).

May Max Pain expirations, based on Fri May 13th data, haven't changed. The May Max Pain points are: SPX 1,170, OEX 555, DIA 103, and QQQQ 36. The Fri closes are roughly: SPX 1,154, OEX 550, DIA 101 3/4, and QQQQ 36 1/4. Also, there are far more puts than calls for SPX, and slightly more puts than calls for OEX DIA and QQQQ, which is bullish, since the Put/Call is a contrarian indicator. Max Pain expirations work over half the time on day of expiration and well over half the time within two weeks of expiration.

Economic reports next week are: Mon Empire State Index (a report on regional manufacturing activity), Tue PPI, Building Permits, Housing Starts, Industrial Production, and Capacity Utilization, Wed CPI, Thu Leading Indicators, and Unemployment Claims, and Fri Philadelphia Fed (a report on regional economic activity).

Last week showed the Mar Trade Balance narrowed with a strong rise in exports, Apr Retail Sales was strong, and both Apr Export and Import Prices rose sharply. The CPI is the most important economic report, next week, although about all the other economic reports are also important. Moderate or above trend growth and higher inflation should be negative for bonds, while moderate or better growth and benign inflation should be positive for stocks, etc.

Some notable earnings next week include:

Mon (after the close): A BGO AVN.

Tue: HPQ AMAT HD DE PNRA SPLS ANF BKS.

Wed: BEAS INTU PETM TLB.

Thu: BRCD BPUR CHINA GPS OPSW.

Fri: None notable.

There may be an excellent earnings opportunity to make a big gain with May options, because of low time values, just before expiration. SPX may hold last week's low at over 1,146 and perhaps bounce to the low 1,160s or the (falling) 50 day MA (currently over 1,175). The trading range was more volatile than I expected last week, and may also be volatile next week.




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