Bonds Blast a Warning

While the stock market continues its “recovery rally,” there’s something strange going on in the bland world of bonds. Check it out:

Short-term Treasury Securities

True, there’s hardly a difference to the everyday investor between a 0.3% and a 0.04% yield. After fees and inflation, you’ll end up losing money either way.

But it’s worth noting that short-term Treasuries are at their highest demand since it hit the fan this time last year. In fact, the Treasury auctioned off $31 billion in 6-month bills yesterday at 0.14%, the lowest level ever. Ditto with their auction of 2-year notes later in the day.

In other words, the majority of the market can’t find anything better to do with cash than stuff it away at a near-negative yield for a few months… not the best sign for stocks. With the holiday lull and tax-selling season right around the corner, it’s hard to blame them.

The weird part is that there’s a rush into stocks and bonds at the same time. While the 6-month and 2-year securities were auctioned at record lows yesterday, the S&P 500 advanced over 1.4%. Kudos to Bloomberg for putting this together:

“For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate — a divergence that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938.

“That’s when the Standard & Poor’s 500 Index climbed 25% even as bill rates tumbled to 0.05%, from 0.45%. In 1939, stocks began a three-year, 34% decline after the Fed increased borrowing costs prematurely to stymie inflation that never materialized.”

Heh, did we detect some sarcasm?

“Be aware that a correction may be due, but as long as stocks and gold continue to make new highs every week, the momentum is strong,” our resource trader Alan Knuckman notes. “Earnings do not begin again until after the first of the year, with Alcoa Jan. 12, so that catalyst for rallies may be done for the next month and a half. Watch for crude and silver to make new yearly highs as confirmation that we are still humming along.”

The Daily Reckoning