The short- and long-term moving averages on benchmark 10-year Treasury yields has converged in a so-called Death Cross, potentially signalling continued bullishness in bond exchange traded funds and more weakness in the equities market.
The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) is up 5.9% year-to-date while broad bond funds such as the Vanguard Total Bond Market ETF (NYSEArca: BND) and iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), which both include a diversified selection of U.S. Treasuries, mortgage-backed securities, agencies, and corporate bonds, are up 4.0% and 3.9%, respectively. [Treasury Bond ETFs Don’t Look Frothy]
Over the past month, IEF gained 1.5%, BND rose 0.8% and AGG increased 0.7%. In contrast, the S&P 500 index was down 3.1%.
Some observers argue that the current risk-off environment can be traced back to the Death Cross formation in the 10-year Treasury yield a while back, reports Jeff Cox for CNBC.
The benchmark yield’s 50-day moving average crossed below its 200-day trend, a move technical analysts believe indicates a significant bearish turn in sentiment that could lead to further weakness. However, in the case of the 10-year yield, the move is really a bullish indicator for fixed-income assets since yields and the bond price have an inverse relationship. Consequently, a bearish outlook on yields is a positive for bond prices.
Yields on 10-year Treasuries are now back down to 2.42%, compared to starting out the year at around 3.0%.
Additionally, some observers argue the trend is a negative for stocks and the S&P 500 in particular.
“After the highly bearish trading action of late July, this is worth considering with the ‘what’s next’ question front and center for most investors,” Abigail Doolittle at Peak Theories Research said in a note. “There’s little doubt that the slicing of the S&P’s six-month uptrend was vicious, but it may be less clear what it will mean going forward. This is where the 10-year yield’s Death Cross enters the equation as a handy tool—’tell’—on what may be ahead for the S&P.”
In the past four times since 2007, a Death Cross in the benchmark Treasuries preceded significant declines in the equities market. Consequently, Doolittle believes a “formal and possibly sever correction,” or a drop of at least 10%, will occur in the S&P 500.
Investors who are wary about the equities market can consider hedging with the ProShares Short S&P500 (NYSEArca: SH), which tries to reflect the -100% daily performance of the S&P 500. SH has increased 3.1% over the past month and is down 5.8% year-to-date.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.