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Global Macro: Yield Curve Takes a Breather

NEW YORK ( TheStreet) -- Investors took profits on the U.S. dollar and reassessed their currency outlook on Thursday as minutes from the Federal Reserve's June meeting hinted at indecision over the initial start date for slowing bond purchases. Most economists still believe September will be the start of a slowdown, but the Fed made it clear that employment targets must be hit for that to be the case.

The first chart below is of iShares Barclays 1-3 Year Treasury Bond (SHY) over iShares Barclays 20+ Year Treasury Bond (TLT). This pair represents the Treasury yield curve. When the price rises, the curve steepens. A steeper yield curve is usually bullish for the economy and equity sectors such as bank stocks.

The pair pulled back yesterday and looks to be overbought with regards to both of its uptrend lines. A pullback in the curve could signal further dollar weakness and commodity market strength.

The next pair is of iShares MSCI Emerging Markets (EEM) over Vanguard Total World Stock Index ETF (VT).

A return of commodity market strength is bullish for emerging economies. Countries such as Brazil, China, and Russia are heavily tied to commodities, and most derive a big percentage of their revenue from such industries.
[Read: <a target="blank" data-add-tracking="true" href=""><em>Why Silver Is a Better Buy Than Gold</em></a>]

With a weakening dollar and stronger commodities, it looks as if the pair below could be hitting an intermediate bottom. Investor confidence returning to inflation-linked assets could drive funds into emerging-equity markets over the next few weeks.

The last chart is of SPDR Barclays High Yield Bond (JNK) over iShares Barclays 7-10 Year Treasury (IEF). High-yielding corporate debt has outperformed recently as the economic climate has improved and the steep rise in interest rates has slowed.

Due to interest rate and other risks, high-yielding debt tends to get hit the hardest when rates rise considerably. The pair did see volatile trading during the markets reassessment of quantitative easing from the Fed. Prices bottomed in early June and have since pushed to new highs alongside equities.

As the economy continues to improve and markets fully price in a rates increase, equity and high-yielding debt markets should continue higher.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Andrew Sachais' focus is on analyzing markets with global macro-based strategies. Sachais is a chief investment strategist and portfolio manager at the start-up fund, Satch Kapital Investments. The fund uses ETF's traded on the U.S. stock market to gain exposure to both domestic and foreign assets. His strategy takes into consideration global equity, commodity, currency and debt markets. Sachais is a senior at Georgetown University earning a degree in Economics.

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JNK $35.30 0.17%
IEF $110.00 -0.04%
EEM $34.39 -0.43%
VT $58.27 -0.61%
TLT $129.38 0.26%


Chart of I:DJI
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NASDAQ 4,775.3580 -29.9330 -0.62%

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