Trading Nation

The last time the bond market did this, it was a buy signal for stocks

The last time the bond market did this, it was a buy signal for stocks

The bond market is making historic moves.

The yield curve between the U.S. 10-year note and 2-year note just inverted for the first time since 2007, just points away from an inversion, and the 30-year yield has plummeted to all-time lows.

Falling yields, which move inversely to prices, suggest investors are flocking to safe haven assets such as the Treasury market on fears of a slowdown in economic growth.

Oppenheimer's head of technical analysis, Ari Wald, said the 10-year Treasury yield is now its most oversold in eight years. However, he sees this as a buy signal for stocks, rather than a signal to flee.

"The stock-bond relationship has changed through time but historically speaking going back to data from 1963 such oversold conditions in terms of interest rates has been followed by above-average returns looking at the S&P 500," Wald said. "We do think that the depleted level of interest rates has made equity prices relatively attractive."

It's not a broad-based buy signal, though, he adds, noting it pays to be selective.

"Looking underneath the surface, especially at the global landscape, you do have much more mixed performance so I think selection is still the key," Wald said. "For us, U.S. large-cap growth I think sets up very well here."

The IVW S&P 500 growth ETF has rallied 18% this year, better than the 12% gain by the IVE S&P 500 value ETF.

Gina Sanchez, CEO of Chantico Global, isn't as sold on the correlation between the bond market and stocks, and sees more of a bearish forecast for equities.

"You can't look right now at the 10-year in isolation. I think you have to look at the entire yield curve and one of the things that is also happening at this point is that you have the 30-year also falling dramatically so the yield curve is flattening," Sanchez said.

The yield on the 10-year Treasury note declined to 1.61% on Wednesday morning, and the 30-year Treasury yielded 2.06%.

"That basically tells you that the outlook for growth and the outlook for inflation is moderating and that's never a great time to be buying equities," Sanchez said. "We were actually hoping that the yield curve would remain steep and that this 10-year would be sort of a flash in the pan and it would eventually normalize but the whole curve dynamic is telling us something a little different which is far more pessimistic."