The Divergence Game

Friday, December 01, 2006 | | 0 comments »


You may be a bit busy today, what with the US dollar in free fall; a contracting US manufacturing sector (according to today's ISM index reading); the Fed's "preferred" inflation reading still stuck (as of yesterday) stubbornly above their 2% comfort zone; a US housing market showing signs of needing to go and have a lie down in a darkened room; and winter storms approaching the US with attendant crude prices above $62.

However, spare a thought for the US bond market as the 10 year yield dips to 4.41% whilst this is typed.

These charts have featured here before, and not that long ago. But when bonds threaten in this manner to diverge from equities and outperform the subject bears revisiting.

Exhibit 1: US 10 year Bond vs Equities (S&P 500), 1996 to 2001


Exhibit 2: US 10 year Bond vs Equities (S&P 500), 2001 to date


Have a thoughtful weekend and give Goldilocks my regards should you see her.

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