How To Trade When Equities & Bonds Diverge?

These divergences are more and less important depending on the overall market conditions and market cycles.
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How To Trade When Equities and Bonds Diverge
Giles Coghlan
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When Equities And Bonds Diverge

Just had a question from Ryan who asks “What emphasis should we put “on the fact that there’s a divergence “between equity prices and bond prices?”

Now, typically in a risk on market, we want to see equity prices rising, and bond yields rising, the fact that they’re not, Ryan’s asking “well what significant “should we allow for that?”

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Why Does USD Sometimes Fall When Equities Rise?

Well, in terms of the risk on sentiment we’re seeing at the moment, we’re seeing that those positive equity prices are flowing through into Aussie, Canadian dollar, New Zealand dollar strength in the currency space, we’re seeing some commodity strength, we’ve seen WTI Brent Crude up, we’re seeing some weakness in the safe haven currency the Swiss Franc and the Japanese Yen. That has meant we’ve got our up side buyers on the Aussie US dollar, and New Zealand US dollar.

So, Ryan, in answering your question, what significance do we allow for it? We just note it.

So, the fact that you’ve got bond yields falling when in a real good risk on sentiment you’d like to see bond yields rising, so it’s just a point to note, it’s something to be aware of.

It’s not particularly impacting our currency choice today, and it’s not particularly likely to, but it just tells us that bond traders are having a slightly different view on the market than equity traders are.

And if you noticed at the start of the year, we saw a divergence like this was happening day after day, and many analysts were asking well, you know, which one is right? Because typically, bond yields will rise with equity markets rising, and when equity markets are falling, bond yields will be falling, they work in conjunction.

So, when they diverge, one generally has to catch up the other. So, that’s the significance to be aware of. It’s just a point to note, Ryan. And it’s not having any particular impact on currencies on a day to day movement.

However, it can be a little bit of a tell that the bond trader, ’cause a bond trader tends to be a little bit more conservative than an equity trader, their outlook as a bond trader is slightly different, more longer term.

So, it has a bit more of a stabilizing, you know, reputation than the ebb and flow of the equity market. So, I hope that gives some perspective for you there, Ryan.

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