The Bond Market Envelope…

You have seen this chart many times in the past three or so years, starting around February 2021 when I first drew it.

Here is an update of it:

It is a chart based on weekly data showing 2019 before the pandemic and up to the present moment.

It was based on doing a flip chart kind of forecast to see where Bonds could potentially bottom over the coming years. At the time bonds were headed lower and where they could eventually drop to was a point of discussion.

Eventually Bond prices started dropping into the envelope in September 2022,

Then in October 2023 they made their bottom and the bull market in stocks took off.

This all dragged on for some time and we now find ourselves in a position where the tail of the envelope has been run out in June of 2024. What could that mean?

We do see that Bonds are showing some power here, what does that mean for both Bond and maybe more importantly for Wall Street, Stock prices?

Maybe even more importantly how does this interact with the slowing consumer economy that we have been talking about since early March when stocks started to reach their valuation targets. No doubt this has all been clouded a bit by the AI frenzy that has been interjected by Wall Street as they got to the party late and now would like to see some more gains before cashing out.

To engage in this question I will add a discussion from my current little toy, the Bing Chat AI module. Here is what it says about the situation.

“When bonds make a bottom and start rallying, it can have implications for the stock market. Let’s break it down:

1. Bond Market Rally:
   • Bonds are considered safer investments than stocks. When bond prices rise (and yields fall), it often indicates increased demand for bonds due to factors like economic uncertainty or central bank policies.
   • A bond market rally typically occurs when investors seek safety, causing bond prices to rise and yields (interest rates) to decline.
   • This rally can be triggered by various factors, such as expectations of lower inflation, central bank rate cuts, or geopolitical tensions¹.
2. Impact on Stocks:
   • Historically, there has been an inverse relationship between bond prices and stock prices. When bond yields fall, investors may shift from bonds to stocks in search of higher returns.
   • Lower bond yields can make stocks more attractive relative to bonds, leading to increased demand for equities.
   • As bond yields decline, companies may also benefit from lower borrowing costs, potentially boosting corporate profits.
   • However, this relationship is not always straightforward. Other factors, such as economic conditions, earnings reports, and investor sentiment, also influence stock market movements.”

So there you go…