Get Pounded As 2021 Winds Down

Hey There Income Hunters,

The US long bond spiked up towards 2% on Wednesday and gave back the .35% plunge in yields we have seen since Omicron hit the scene.

We also had the hawkish FOMC statements from Jerome Powell that brought in bond buyers. 

The bond chart has taken an ugly turn and it demands a re-think. There’s been a shift in psychology on Omicron, namely that it’s just a cold and could possibly speed up the process to herd immunity. 

Today, we’ll take a look at the signposts from Bond Land that may give us some insight into early 2022 money flows.

The 2-year-to-10-year Yield Curve Spread

The slope of the interest rate or yield curve is one of the most important gauges we have as a predictor of economic growth.

The rule of thumb is that when the 3-month bill-to-30-year bond spread turns negative then a recession is not far away. 

The logic is that the Fed has been in a tightening cycle and higher short rates are causing a slowdown in growth. That, in turn, will cause a deceleration in inflation, and lower inflation is good for bonds.

Notice the boxes below, which highlight either periods of tapering QE or rate raising. The 2-year to 10-year spread flattened every time. Overall it reached a wide of around 2.75% and became as negative as -.5% …

I think the curve will continue to flatten in the weeks ahead as the Fed attempts to find a balance between slowing inflation while not sending the economy into recession. 

The yield curve will give us clues to how they are doing. 

The Credit Spread

High yield junk bonds are the other significant signpost to pay attention to.

I have said this before and continue to believe:

Corporate bonds will be the market that causes the most damage to the economy during the upcoming debt crisis.

I currently have a bearish option trade in the iShares High Yield Corporate Bond ETF (Ticker; HYG).

Notice the HYG chart below that illustrates its failure to break through the 200-day moving average this week … 

This may be a reversal in trend that will build momentum in January if we get a similar rolling over of the broad stock market. 

Bring It Home

Bonds breaking down this week may be an important indication of continued inflationary pressures and a negative hanging over the mega-cap stocks that have led the recent rally in S&P 500 and Invesco QQQ Trust Series 1 (Ticker: QQQ).

That is a signal to be ready to jump on a technical breakdown in the indexes in the weeks ahead.

The two things that will help the Fed are higher bond rates and a lower stock market. Those two moves will reduce consumer spending and soften price hikes. 

It should be a fun Q1. Stay tuned and as always …

Live and Trade With Passion My Friends,


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