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Tracking the Market with Interest Rates

Posted on February 4, 2009 by Adam

Another way to get a good idea of what’s going on behind the scenes is to look at treasury bills. In particular, I like to look at the yields on the 10 year treasury note. It can be found on stockcharts as $TNX.

Why would I care about government bonds? It actually makes a lot of sense if you think about it. Stocks are risky, while bonds are guaranteed. When the market is bearish, demand for treasury bills will usually be higher, as investors run for safety in bonds. As a result, that pushes the yield of those bonds lower. When the market is more bullish, everybody wants to be in stocks and they sell their treasuries, pushing yields higher.

By watching the yields, we can get a good barometer of how the market is shaping up. I know I’ve been fairly bearish in my bias over the last week or so, but I’m starting to reconsider that based on the market action and the confirmation we’re seeing in treasury yields.

The interest rates on the ten year treasury note have been trending steadily higher, while the market has been making up its mind.

Look at the chart of the $TNX. Notice how during all this time when the market has been making up its mind about where to go, the yield on treasury bills has been steadily increasing, in a nice, solid trend. That indicates more investor confidence in stocks. The $BPNYA is on bull confirmed, and this may be saying the same thing.

I sure hope it lasts.