Is the Bond Market Showing Confidence These Days?
The "liquidity ratio" peaked out this year in the same week as did the "confidence index" using Moody's numbers. However, the "liquidity ratio" hit a bottom around the same time that the S&P 500 index was hitting the near term bottom in late May. This would indicate that some of the "safe haven" funds coming into the Treasury market began to spill over into the high grade corporate bond market. The financial markets were becoming "more liquid" due to the funds attempting to achieve higher yields without much loss of quality. Thus, the stock market began to rise again in June as confidence rose on the "liquidity" of the financial markets, even though the liquidity had not flowed as far as the intermediate grade instruments. It was not until late July that more and more funds moved into Baa or intermediated grade bonds and Barron's Confidence Index started to rise again, along with Moody's numbers. The "liquidity ratio continued to rise through to the present so that for the last several weeks we have had both the "confidence index" and the "liquidity index" giving off similar signs. Note, however, that the yield on the 10-year Treasury yield has been rising over the same time period, reaching its lowest level on July 25…1.43 percent. Currently, the 10-year Treasury is yielding over 1.80 percent. The last several months, therefore, have been an interesting time period. The movement of international funds into the United States has caused some financial market relationships to be distorted. Still, it is important to work with the data and see if events can be explained by including more information in one's analysis. Historically, the "confidence index" information has moved in the same direction as the "liquidity index" information. When they differ it is important to try and reconcile why they might be moving in different directions. In the current situation, I believe that looking at the two ratios helps us to understand a little bit better what has been going on. Right now, the bond markets are reflecting market confidence and market liquidity, both of which are positive signs for a rising stock market.