Who is telling who what and what are the saying?
Some of my favorite risk indicators are "risk-on" bond ratio's. These bond ratio's (using ETF's as proxies) consist of different type of bonds where one bond is consider "riskier" than the other. Some of my favorite ratio's I will share with you here, but more importantly, how do they match up over the past 5 years relative to equities, specifically the S&P 500 Index?
The white lines are the bond ratio's and the blue line is the $SPX.
Let's start with the extreme:
1.) High Yield Corporate Debt ($HYG) / 20+ Year Treasury Bonds ($TLT) Ratio
What we can see from this chart is how this bond ratio has lead the price action with equities starting with the bottom in 2008, in which the ratio bottomed first, then made a higher lower in 2009, which at the same time equities made a low in late 2008 but made a lower low in 2009 before ripping higher, led by this bond ratio.
However, in early 2011, the ratio made a new 5 year high before selling down heavily, which equities followed soon after, however as equities have rebounded, the bond ratio has stayed relatively flat in that time.
2.) High Yield Corporate Debt ($HYG) / Investment Grade Corporate Bonds ($LQD) Ratio
Much like first chart with slight difference (such as the bottom in 2009), the bond ratio has been flat compared to equities since early 2011.
3.) Investment Grade Corporate Bonds ($LQD) / 20+ Year Treasury Bonds ($TLT) Ratio
Again, rinse and repeat...
4.) Treasury Inflation Protected ($TIP) / 20+ Year Treasury Bonds ($TLT) Ratio
One says inflation, the other says disinflation/ deflation...
Where is risk to head next? Equities continue to make new highs while risk-on bond ratio's remain flat. A recalibration will occur, but what will the convergence be? Will equities head lower? Will risk-on bond ratio's recalibrate with higher equity prices? Will they meet in the middle?
All we have is time...