Watching the Relationship Between Treasuries and High Yield

• Posted by Greg Harmon
• on August 24th, 2011

One of my broad market indicators, the ratio between Treasuries and High Yield Bonds, is showing signs of topping and reversing in favor of High Yield. To me this would be a piece of the broad market puzzle that indicates equities are ready to move higher. Take a look at the ratio chart below of the iShares Barclays 20+ Year Treasury Bond Fund (ticker: $TLT) against the iShares/SPDR Lehman High Yield Bond ETF (ticker: $JNK). The signs of a potential top are evident when looking

at the Relative Strength Index (RSI) that is falling from the overbought levels and the Moving Average Convergence Divergence (MACD) indicator that is decreasing. It also looks like it may have printed a double top. A continued move lower will confirm a move from Treasuries into riskier High Yield Assets. But looking at the $JNK by itself gives a different read. The weekly chart below shows a bounce off of support of the 100 week Simple Moving Average (SMA) and the resistance just below the 50 week SMA. But the other indicators on the chart suggest that $JNK will move lower. The SMA’s are all rolling lower, the RSI is trending down and the MACD is growing more negative and volume has been decreasing as it moves higher. From this perspective the bounce may have just been a short term over sold correction to get back into the Bollinger bands. If this is the case then support can be found lower at 37 and then 35.50 near the 23.6% Fibonacci retracement from the move off the March 2009 lows to the recent highs. Below that 34.50 and then 32.38-33 are next support.

So which is it? Is there a move from Treasuries to High Yield or not? Actually both charts could be telling the same story, just not the typical one. There could be a move out of Treasuries and also a move out of High Yield, but just not as fast as the move out of Treasuries. This would foreshadow a move out of all assets, perhaps into cash, which might happen if a recession is forecast by the markets. So this indicator remains in the ‘Watch but do not react’ category for now, a check in the column for equities but still far from a trigger.

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