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The strong positive correlation between Bonds and
Commodities is creating an unholy alliance and confusing investors.
Strange how markets work!
Just when we thought we had it all figured out, just
when we became convinced that inflation would win the day, those damn
Treasury Bills just refused to confirm our hypothesis.
There is a somewhat strange and almost unholy
alliance developing between Bonds and Commodities.
Chart 1 - 10Yr Treasury Price vs. Crude Oil (green)
The theory is that rising commodity prices (we have
used Crude Oil in our example) is price inflationary. That is, when raw
material prices rise, the general price level rises along with it.
The Fixed Income markets are supposed to be
hyper-sensitive to price inflation. Bonds are supposed sniff out price
inflation and interest rates should rise rapidly as they discount the effect
of an increase in price inflation.
Therefore, a well worn economic rule is that
commodities should move inversely to Bonds.
Not so per the above chart. During certain periods -
November 2006 to February 2007 and June 2007 to September 2007 - both Oil and
Bonds moved together. Oil climbing on inflationary fears and Bonds from a
flight to safety ala credit crunch.
Whereas we can only speculate as to why or how long
these two markets move together (perhaps debt monetisation / a continued
flight to safety from the real estate slump) we are fairly certain that in
the long-term they will decouple and go their own separate ways.
Chart 2 - Long-term chart shows Bonds and Oil negatively correlated
Our guess is that with the propensity and
willingness of the Fed to reduce rates further, a long Oil short Treasury
position will win out in the end.
More commentary and stock picks follow for
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Greg Silberman CA(SA), CFA
greg@goldandoilstocks.com
I am an investor
and newsletter writer specializing in Junior Mining and Energy Stocks. Please
visit my website for more free articles and analysis
Click here: http://blog.goldandoilstocks.com
This article is
intended solely for information purposes. The opinions are those of the author
only. Please conduct further research and consult your financial advisor
before making any investment/trading decision. No responsibility can be
accepted for losses that may result as a consequence of trading on the basis
of this analysis.
_______________________________________________________________________
This
article is intended solely for information purposes. The opinions are those
of the author only. Please conduct further research and consult your
financial advisor before making any investment/trading decision. No
responsibility can be accepted for losses that may result as a consequence of
trading on the basis of this analysis.
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