Equity lessons from the bond market

Political operative and former Clinton advisor James Carville once quipped that he wanted to be reincarnated as the bond market so that he could intimidate everybody. Equity investors and traders are well advised to remember that comment, as there is much to be learned from a cross-asset, or inter-market, viewpoint from bond market action.

For example, the relative performance of junk bonds is a terrific indicator of overall risk appetite.

The relative performance of financial stocks is also related to the yield curve, with the caveat that any analysis using a single variable can lead to erroneous conclusions as there may be other factors at play.

The shape of the yield curve is also correlated with the relative performance of value and growth stocks. That relationship makes sense, as a flattening yield curve (falling green line) is the bond market's signal of slowing growth expectations. In an environment where growth is scarce, growth stocks should outperform, and vice versa.

So what is the bond market telling us now?

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