Following the dramatic outperformance of Treasurys (compared to stocks) since the beginning of April many have been fast to proclaim Bill Gross wrong (when he is merely early) in his decision to abandon the asset class, while other prominent deflationists have been pounding their chest, claiming how right they have been. Well, as the chart below shows, the recent UST move has to be put in context, and the context is not pretty for "deflation." What is more troubling is that according to a technical resistance levels, the period of abnormal bond strength may be over. On the other hand, should the ratio of the UST/SPX breach above the 0.97 level, the down cycle will be broken and it may be time for a new regime of consistent Treasury outperformance.
Additional thoughts from SMRA:
Even after its longest weekly winning streak since the depths of the financial crisis (the 8 week rally of late '08), the 10-Yr Treasury futures contract has yet to reverse the long-term trend of underperformance against the S&P 500. As today's Chart of the Day reveals, the next big chance for Treasuries to significantly alter the market's long-term view of stocks being the preferred asset class has arrived, and it's not going to be easy the first time around.
Since the start of the Treasury market's spectacular stretch of consecutive weekly gains in early April, market participants have flooded into Treasuries to the tune of 9% outperformance against their rival asset class (specifically, the 10-Yr continuous contract vs. the S&P 500).
Now, after a constructive bottoming effort (double bottom) during the 1st half of this year, the benchmark Treasury contract is faced with some significant technical headwinds in its relationship with stocks. For instance, where the ratio was last reported at 0.0970 (as of Wednesday's close), it must close above 0.0975 to 0.0980 to make the respectable run against equities these past few weeks more than just a countertrend effort.