Bond Market Lessons From The Days Of Yore

Facts do not cease to exist because they are ignored.
—  Aldous Huxley

Before IPO, talking trader babies, moral hazards and internet bubbles…before 0% interest rates, option-ARMs, house flipping hair dressers and housing bubbles…before TARPs, 10% unemployment rates, QE 2.0s and commodity bubbles, the United States had a stock market would generally rise and fall with the normal ebbs and flows of the business cycle.

In these days of yore, bond yields directly competed with stock returns for the attention of investor affection.  In those days, the bond market was thought to be smarter and more attuned to the business cycle.  And since stock prices followed the business cycle, bonds could often fore-tell the future for stocks.  Old, grizzled stock pros who had survived the 1970s bear markets, would often look to the bond market for guidance on the future of stock prices.

These veterans knew that falling interest rates were bullish for stocks as they were in 1982, when after several false starts, one of the greatest bull markets in history kicked off.


Likewise, these veterans understood that rising interest rates would have the opposite affect and generally spell trouble for stocks.  For instance, in October of 1993, the veteran stock investors got a well-telegraphed warning when bond yields suddenly began rising as interest rates anticipated a Fed tightening.  Stocks continued higher on their merrily way for  several months until they snapped to attention and promptly fell four months after bond yields had bottomed.


And again, just a year later, bonds again telegraphed highs and lows in the stock market.


The grizzled veterans also understood what would happen if the stock market ignored the message of the bond market too long. They had gone through the October 1987 crash, when stocks closed their eyes, covered their ears and started yelling LALALALAL!, launching themselves to the sky.


Most of these veterans are long gone now, having been ridden out of town by high flying internet stocks, gravity defying home builders or other phenomenon that they could no longer understand. But just because they aren’t around to warn young gun hedge fund managers or high frequency trading computers of the risks of rising interest rates, doesn’t mean bonds won’t have an affect on stocks.

As the veteran stock traders learned so well in 1987, the stock market can only ignore the bond market so long.   And stocks have ignored the bond market for five months now as investors plowed back into the risk trade.  But those rising rates will bite at some time.  And as the wiley veteran would say, it will probably happen sooner than anyone expects.


The lessons of the bond market have long been lost among the circus of high frequency trading, put-selling hedge funds, activist Fed chairmen and single stock ETFs but they have not been forgotten.  The bond market might yet show the stock market a thing or two about forecasting the the future.

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99 thoughts on “Bond Market Lessons From The Days Of Yore”

  1. Your school may have done away with winners and losers, but life has not. In some schools they have abolished failing grades; they’ll give you as many times as you want to get the right answer. This doesn’t bear the slightest resemblance to anything in real life.

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  3. Sometimes we don’t realize the good fortune we have or we could have because we expect “the packaging” to be different.
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  7. The swap facility makes sense bauscee the role of the Fed is to allow the appropriate repricing of risk in a stable and orderly market.This does NOT mean the Fed is repricing risk. Far from it. It is simply trying to allow that repricing to occur in an orderly fashion.Short term bridge financing to help smooth the flow of the mountains of derivatives that are being repriced is part of greasing the wheels.But these are loans, not gifts. 30 day loans.A 30 day loan is not a gift.

  8. I recommend in good faith and acodnr that you read everything Krishna Guha writes daily about the Federal Reserve in the Financial Times of London to learn more about the current debates raging inside the FOMC. For example two members, Dallas and Philadelphia, opposed the size of yesterday’s cut. This is very newsworthy, but it was woefully underreported in the US press.Read the FT. And stay tuned to this channel for weekly updates.Matt

  9. I remain usearnuedpd that massive offloading of 455 trillion in derivatives, with its massive impact on the wealth effect, coupled with a sharp downdraft in the housing market will have nominal effects on consumer demand and purchasing power. Are you persuaded that margin requirements will not be increased in the futures markets? They are already beginning to do that. Increasing the margin requirements in futures would intensify the downdraft.

  10. I have been trying to do this kwsorsheet but i do not understand this at all. please help.Directions:To understand the role of the market professionals and how a stock is traded at the NYSE, place the following steps in chronological order from the time Amanda Smith, the investor, decides to buy 100 shares of Great Computer stock to the time the order is executed.-The stockbroker gives Amanda the current market price of Great Computer Company and she instructs the stockbroker to buy 100 shares.-Amanda Smith of Hartford, CT, desides to buy Great Computer Company stock. She calls a local stockbroker who works for a firm that is a member of the NYSE.-The broker sends the order to the Trading Floor of the NYSE electronically via the SuperDOT System to the specialist’s workstation or through Broker Booth Support System (BBSS) to the broker’s handheld computer.-After the transaction is executed, the specialist’s workstation sends notice to Amanda’s firm (the buyer) and to the seller’s firm, as well as to the consolidated tape so that a written record is made.-At the trading post, the specialist that handles Great Computer Company Stock makes sure the transaction is executed in a fair and orderly manner. Amanda’s order competes with other orders in the Great Computer Company at the point of sale for the best price.-The transaction is processed electronically. Amanda recieves a trade confirmation from her broker’s firm describing the trade, and the exact amount she owes for the 100 shares of Great Computer Company plus any applicable commissions.-The tranaction is reported by computer and appears within seconds on the consolidated tape displays across the county and around the world.-Amanda asks her stockbroker the current price for Great Computer Company stock. The broker checks the quote (the highest bid to buy, the lowest offer to sell) for Great Computer Company stock using an electronic market data system.Im sorry i know that this is alot but all i need is them in order.I really had no idea how to do this.If you know anything about this, please help thank you so much.

  11. they are useless, my are mean for bahcees not winter weather, which is often the misconception, they fall apart easily,my wife through hers out in just 2 weeks, i taught she was going to burn then and give it back.She said they were nice to wear as house slippers

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  13. In my opinion enrrcucy market is more difficult to trade than stock market. If you refer to FX market you must remember that this is non-regulated environment.Obviously it`s impossible to describe major factors of enrrcucy trading in this post. The best you can do as beginner is to find broker allowing you to play with little money (mini contracts like and many others). This way you get sense of what you can expect without paying too much for your lesson.

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