An "Interest"ing Relationship

Studying relationships between different security prices is an important component of our research, as these relationships can often be a leading indication of emerging price trends in financial markets. One such relationship that we watch very closely is the spread between the price of the US T-Bond contract and the Euro Bund contract. This relationship is particularly important to us now, since interest rates have been very closely related to both US equity prices and the value of the US Dollar for some time.

Back on March 10th, in our weekly Keys To This Week report, we said:

"The T-Bond/Euro Bund Spread: BEARISH FOR PRICES. This spread, which is the price of the Euro Bund contract subtracted from the price of the US T-Bond contract, continues to trade at an historic wide extreme which had previously coincided with most every important multi-month peak in the price of both contracts during the past decade. It indicates that US bonds are over-valued relative to the Euro Bund, and suggests that a decline in the prices of both assets is imminent."

Here's the corresponding chart from that report.

Since that report through May 7th, the T-Bond contract has declined by more than 6-00 full points or 5% while the yield of the US 10-year Note has coincidentally risen by 59 bps or 14%.

Understanding how relationships between different markets can be a leading indicator of the future direction of bond and equity prices can be a great advantage in getting out in front of emerging investment trends, rather than trying to chase them once they become apparent to everyone.

More information about our investment research is available at www.asburyresearch.com .