Everyone Wants on Flight #2011 to Washington

• Posted by Greg Harmon
• on June 9th, 2011

Wednesday I wrote about the strength exhibited in the charts of the Treasuries ETF’s (link below). It raised an interesting question about whether the move higher in Treasuries was a sign of a flight out of stocks into bonds in general or a flight to quality. The relationship between the iShares Barclays 20+ Year Treasury Fund (ticker: $TLT), iShares iBoxx Investment Grade Corporate Bond Fund (ticker: $LQD) and the SPDR Lehman High Yield Bond ETF (ticker: $JNK) can help determine which flight we are on and the three charts below can illustrate.

TLT vs LQD

The chart above of the TLT against the LQD shows the ratio rising out of a basing from February through to May. The Relative Strength Index (RSI) of the ratio is rising and the Moving Average Convergence Divergence (MACD) indicator is increasing. This ratio is clearly rising, indicating that investors are preferring Treasuries over Corporate Bonds.

TLT vs JNK

The chart of the ratio of TLT against JNK is almost identical. It also rose out of a base and has a rising RSI and MACD. So investors prefer Treasuries to high Yield Bonds as well. But this could just mean that investors are adding to treasuries and not to Corporate and High Yield Bonds. To complete the picture look at the chart of the LQD against the JNK below. This chart also shows a move higher

LQD vs JNK

out of a base with a rising RSI and an increasing MACD. This is an indication that investors prefer Corporate Bonds over High Yield Bonds. So the chain of charts then reads that investors prefer Treasuries over Corporate Bonds and both over High Yield Bonds. This is indicative of a flight to quality not just a flight to bonds. If you still have any doubt one last chart. The ratio of the JNK to the S&P 500 SPDR’s (ticker: $SPY) below shows the exact same pattern of a rise out of a base with a rising RSI and increasing MACD.

JNK vs SPY

This turns the equation on investor preference to: TLT > LQD > JNK > SPY. And it also turns the flight to quality also into a flight to security. With the Government still locked in a stalemate that might lead to a shutdown in August what does that tell you about the state of the world and our economy. Feel free to pour a shot now.

Which Treasury ETF is Right for Your Personality

(As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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