There is an interesting divergence unfolding. The stock market keeps rallying to new record highs, yet the Treasury market isn't selling off.

This is interesting because Treasuries have safe-haven status and one would think that money parked in Treasuries as a safe haven would be flowing out in the midst of a raging bull market.

That hasn't happened, however.

There have been some moments of weakness, but the fact of the matter is that the 10-yr note yield of 1.81% is roughly where it was in late-2011. Over the same period, the S&P 500 has increased approximately 170%, excluding dividends.

Looking at things on a shorter time frame, the S&P 500 started its latest rally leg last October. At the time (Oct. 3), the 10-yr note yield was 1.53%.

Clearly, the Treasury market has seen some selling interest. By November 8, the 10-yr note yield had risen to 1.94%, but that was pretty much it.

The 10-yr note yield has been in a sideways trading channel ever since, spending its time mostly between 1.75% and 1.90%. The S&P 500, however, hasn't gone sideways. It has risen another 7% since November 8.

In brief, stocks are up big since early November, yet the 10-yr note has been basically flat. Why might this be the case?

Many investors think the stock market is too complacent and at heightened risk for a meaningful pullback, which in turn would drive safe-haven buying interest in the Treasury market. Longer-dated Treasury securities are more inflation sensitive and there haven't been any inflation scares in the latest batch of inflation data, which includes average hourly earnings, the Consumer Price Index, the Producer Price Index, and the Import and Export Price Index.

At the risk of sounding like a broken record, Treasuries continue to hold appeal for foreign buyers faced with extremely low and/or negative sovereign rates at home and weaker currencies. Fixed-income investors don't have the same confidence equity investors seem to have in the idea that U.S. economic growth is going to accelerate in a big way. There are latent volatility risks, including the stock market's overbought condition, geopolitical unrest in the Middle East, unresolved trade issues, and the presidential election, which have left investors shy about removing the safety hedge that U.S. Treasuries provide. The aging (and retiring) of baby boomers has fostered an anxious desire to ensure there is a return of capital, which Treasuries offer when held to maturity.

The ideas we have offered for why the 10-yr note yield has shown such resolve in recent months are open for debate.

We can't profess to know the exact reason why the Treasury market isn't selling off when stocks keep rallying. We can only profess that it is a peculiar picture of resilience -- and one perhaps that could be an alternative warning sign for equity investors at a time when the CBOE Volatility Index isn't ringing any alarm bells.

 

at pohare@briefing.com