In this article, Mish Schneider, director of trading research and education at MarketGauge.com, explores how bond investors are positioning following recent inflation estimates.
Last week, increasing bond yields had the market worried.
Come Monday, the iShares 20 Plus Year Treasury Bond ETF [TLT] gapped higher and ended the day up 1.12%.
This fared especially well for growth stocks, as the Nasdaq 100 (represented by the Invesco QQ Trust ETF [QQQ]) tests resistance from the 50-day moving average (DMA).
But what was the underlying factor that increased bond yields?
This is where inflation comes in.
Last week, Jerome Powell, chairman of the US Federal Reserve, gave new 2021 inflation estimates that increased from 1.8% to 2.4%
This worried bond investors, because if inflation goes up it will decrease the value of the dollar, which means that bond yields will need to increase to offset the decrease from value of the dollar.
Hence, good old supply and demand comes into play as bond auctions are forced to sell bonds for lower prices to meet the waning demand.
Cheaper bonds force the yields up, which means investors and the wider market, will not be too happy.
An easy way to tell if investors are worried about increasing yields is by watching not only the TLTs but also the SPDR Bloomberg Barclays High Yield Bond ETF [JNK].
Because high yield bonds are riskier to own, they are a good representation of investors’ risk appetite in the stock market.
In conclusion, if JNK goes up, watch the 50-DMA to clear as this shows investors’ confidence is improving.
However, if JNK and TLT begin to break down, then stay cautious and watch for their recent lows to hold as support.
This article was originally published on MarketGauge. With over 100 years of combined market experience, MarketGauge's experts provide strategic information to help you achieve your investing goals.