TIPS Bond Fund and 20 Year Falling

May 30, 2008: 11:12 AM CST

Yesterday, I examined the 10 Year Note, commenting that it had broken resistance.  Now, let’s look at two bond funds to see how prices are being affected, and also view a strong correlation between the 10 Year Note Yield and the S&P 500 Index.

First, the TIPS Bond Fund:

iShares writes:  The iShares Lehman U.S. Treasury Inflation Protected Securities Bond Fund seeks results that correspond generally to the price and yield performance of the inflation-protected sector of the United States Treasury market as defined by the Lehman Brothers U.S. Treasury TIPS Index.

This bond fund formed a potential head and shoulders pattern and is at an important technical (charting) juncture.

I have drawn two potential necklines for the Head and Shoulders pattern, both of which are now broken to the downside.  The interesting juncture is the rising 200 day moving average just beneath the price.  The fund supported on that level on Thursday, and is currently testing the horizontal neckline – it will be interesting to see which level holds and what that might mean for the fund and the overall market.

Some readers mentioned the TLT 20+ Year T-Bond fund (also iShares) and I wanted to examine its performance as well.

While not forming a clean Head and Shoulders (potential) reversal pattern like the TIPS fund, the longer-term bond fund has indeed been breaking down from a consolidation zone beneath its key 50 and 200 daily moving averages, and the fund has broken clearly to the downside and made new lows for 2008.

Price could rally back to test the 200 day, but if the breakout is valid, this could likely mean the following:

Bond Prices will continue to fall

Bond/Note Yields will begin to rise

The Fed could start raising rates again

If Money is flowing out of bonds and into the stock market, that is bullish for the US Indexes

Speaking of the US Stock Market, let’s look at the recent strong positive correlation with the S&P 500 Index (and Dow Jones and NASDAQ) and the 10 Year Treasury Note Yields.

S&P 500:  Green
10 Year Note Yield:  Red

Notice the performance of both markets in 2008, and how they have been strongly correlated.

Strength in the market has resulted in larger inflows into the market likely from bonds, which drives bond/note prices down and thus yields up.  The bond and stock markets are not always this correlated, but tend to be more so in conditions of economic uncertainty.

Let’s continue to watch this relationship play out in the broader markets, and what the potential for higher yields (and interest rates) mean for other related markets.

3 Comments

3 Responses to “TIPS Bond Fund and 20 Year Falling”

  1. Eyal Says:

    Hi,

    What’s the benefit of these TIPs if they don’t protect you in a higher rates ( i.e. inflationary state ) environment ? Obviously, they had a big run, because they are reflecting the future conditions, but I guess this decline is just to take some “breath” before they go higher again. Looking at the Weekly charts, there is a different picture for the TLT and TIP. What am I missing here ?

  2. Corey Rosenbloom Says:

    Eyal,

    I am just as shocked to be seeing these developments on the TIPS fund, and you hit it right on that these are strange instances.

    On the weekly chart of the TIP, it is showing three negative swing divergences, and price has broken its 20 period average and just supported (bounced) off the 200.
    The price has made a lower swing high and could take out the recent low, which would indicate a new downtrend, despite strength in yields.

    The TLT is showing an even more ominous ‘topping’ pattern, same three-swing negative divergence, but it has broken its rising 50 period average, signaling a potential change in trend.

    I’m going to be keeping my focus on this development to see the resolution, but right now, I would guess that odds favor more downside potential in these bond funds.

  3. Eyal Says:

    Hi,

    What's the benefit of these TIPs if they don't protect you in a higher rates ( i.e. inflationary state ) environment ? Obviously, they had a big run, because they are reflecting the future conditions, but I guess this decline is just to take some “breath” before they go higher again. Looking at the Weekly charts, there is a different picture for the TLT and TIP. What am I missing here ?