Hey Income Traders,
You've probably felt something off with the markets since February…
Barclays put a number on it: 0.56.
That's the average link between stocks, Treasuries and oil since the Iran war started, and it's the highest reading in more than 30 years of data. Barclays flips oil upside down for the math, so a high reading means stocks and bonds sink together when oil climbs and rally together when it drops.
For most of the last 25 years, that number sat below zero. Stocks fell, bonds rose and softened the hit. That's the whole idea behind the 60/40 portfolio (60 percent stocks, 40 percent bonds), right?
Yeah, I know. "Hans, that's what my bonds are for." Not this time.
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Look at the 10-year yield. It closed at 3.94 percent on Feb. 27, the day before the war started, and this week it tagged 5.29 percent, the highest since 2007. Yields go up when bond prices go down, so that's your bond sleeve losing money on the same days your stocks do.
Fed funds futures price about four more quarter-point hikes by this time next year. And the MOVE index (think of it as the VIX for Treasuries) has gone bananas: it's up at least 35 percent in September, something it's done only eight times since 2008.
So it all comes back to oil. CME data puts the link between crude and the 10-year yield at 65 percent this month, one point shy of the 66 percent record from the 1990 Gulf War. I've been flagging this oil-to-rates pipe in the Chart Room since August, and now it's moving stocks too.
Where are you going to hide?
- Your book is one position. Ten short puts (trades that pay you as long as a stock stays above a set price) plus a bond sleeve add up to one bet that oil comes down.
- Don't sell vol (collecting option premium by betting things stay calm) while it's still climbing. The VIX has hovered around 16 while the MOVE closed above 100 for the first time since spring, and Barclays told clients this week that cheap stock volatility makes downside protection worth buying.
- It cuts both ways. A Hormuz deal rallies everything at once, and the same Barclays note says a U.S.-Iran breakthrough would lift stocks and bonds together.
What I want to see: stocks shrugging off an up-oil day. That'd be the first crack.
Trade smart, stay hedged. Just make sure the hedge isn't the same trade.
Here for a good time AND a long time,
Hans