Interpretation of the economic implications of the changing relationships of asset classes is beyond the realm of technical analysis. Still, action in the global bond market is hard to ignore right now with U.S. and many European government bond prices rising while riskier junk-bond prices are falling.
 
This suggests rising risk aversion. Despite climbing U.S. stock prices, the credit market’s action—with yields on government obligations falling to unprecedented lows while riskier credits’ yields are rising—implies nervousness about the global economy. Perhaps—though drawing big conclusions about the global economy is well beyond the scope of this column.
 
But what we can do here is observe that the bond market is not confirming what the stock market is doing, leaving investors with few choices for their portfolios. The yield on the benchmark 10-year U.S. Treasury note traded at a stingy 2.29% Wednesday, which is well below the dividend yield of many blue chip U.S. stocks (see Chart 1).

CHART 1

10-Year Treasury Yield

That is not much for investors to like. Given low yields, it would take a relatively small rise in yields to lower prices enough to erase a year’s worth of interest payments.
 
The yields on some European government 10-year bonds are even lower. Germany, for example, has offered less than a 1% yield for more than two months now with a current rate of 0.71% while two-year notes yield less than zero—negative 0.04%. Even the weaker economies of Italy and Spain -- the “I” and “S” in the nonflattering PIIGS acronym -- sport rising bond price trends and falling yield trends for most of this year.
 
Indeed, both yields are not only lower than the yield in the U.S but are both below 2%.
 
All of which suggests European economic weakness and the risk of outright deflation, something with which both of their stock markets concur. Stock trends there have been pointing lower since June despite widespread expectation of the European Central Bank enacting more aggressive monetary stimulus.
 
Junk bonds, on the other hand, are not faring quite as well. Since June, the SPDR Barclays High Yield Bond exchange-traded fund (ticker: JNK ) has also been in a tailspin (see Chart 2). In fact, after rebounding from a panicky selloff in October that also hit stocks, the junk bond ETF fell nearly all the way back to its previous low levels. Domestic stocks recovered to all-time highs, but junk bonds are where they were at the depths of the October thrashing.

CHART 2

SPDR Barclays High Yield Bond ETF
With safe Treasuries in rising trends and risky junk bonds in falling trends, the bond market is telling us that it does not agree with the domestic stock rally. That could reflect the impact of tumbling oil prices, which have hit prices of energy-related high-yield bonds especially hard. According to long-time high-yield guru, Martin Fridson, chief investment officer of Lehmann Livian Fridson Advisors, energy-related junk bonds—which comprise 15.5% of the market—had a negative return of 3.38% last month, significantly contributing to the overall sector’s negative 0.72% return last month.
 
The next issue we need to address is the growing chorus that the bond market is in a bubble. Bond bears assert the end of Federal Reserve purchases of Treasuries and mortgage-backed securities means there won’t be enough buyers to keep yields from rising and prices from falling. Further, inflation “should” be right around the corner as the result of the expansion of the Fed’s balance sheet, which would burst any bond bubble.
 
The evidence shows markets are smarter than that. The end of the Fed’s buying was telegraphed months ago. The collapse in oil and other commodity prices also hardly suggest surging inflation.
 
Even Treasury Inflation Protected Securities, as tracked by the iShares TIPS Bond ETF, suggest that inflation is in check. The TIPS ETF peaked in June and has been falling since September in both absolute terms and relative to the nominal Treasury market. The latter confirms the market is not worried about inflation.
 
Even though the iShares 20+ Year Treasury Bond ETF is still well below its lofty levels of 2012 (see Chart 3), the trend in the long-term bond market is still orderly. Popular measures of momentum are also far from overbought, which means there cannot be a bubble inflating. The market is still rather ordinary by charting standards.

CHART 3

iShares 20+ Year Treasury Bond ETF

That does not preclude that the bond prices haven’t already seen their absolute highs and could retreat from here. But a bubble? Not likely.
 
In my view, the bond market is telling us two things. First, low yields across the globe point to economic weakness, which is being met by ultralow rates set by central banks that are likely to persist. Second, risk aversion is growing even as the Dow Jones Industrial Average notches new records.
 
Taking it easy with your money is probably a good idea.
 
 
Michael Kahn, a longtime columnist for Barrons.com, comments on technical analysis at www.twitter.com/mnkahn. A former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, Kahn has written three books about technical analysis.