Tuesday, December 9, 2008


last week the Smoking Securities blog posted a point and figure chart of LQD, the Investment Grade Corporate Bond ETF. with the caption:

With Treasuries getting bubbly, AAA corporations are offering higher yields and reasonable safety. If there is a credit crisis, it isn't showing up in LQD.

I've never paid any attention to this LQD before, but I thought it would be amusing to play around with it relative to some other symbols. so far the coolest ratio I've found has been LQD:TLT (TLT the 20 year plus Treasury bond ETF). the first thing of note is that this ratio actually started declining in 2003 as you can see on this point and figure chart:

and then there is this equivolume chart that focuses on the more recent action:

the wider bars indicate greater relative volume of LQD to TLT. narrower bars the opposite. doesn't the chart really paint a picture of how long the last few months have seemed?

does this potential double bottom here hold? if it doesn't then the present liquidity rally will be over right quick. this whole ratio can be viewed as something of a confidence index. John Authers of the FT talked about the 'Investment Grade Crisis' the other day, pointing out the huge spreads between corporate yields and Treasuries. and he ended his talk saying that if these spreads don't improve then the stock market rally will be very short lived. he has a point.

it seems to me that if this general liquidity rally persists it will come to be seen as the Last Great Yield Chase. if that's the case then corporate bonds and equities should make a bigger splash then, say, commodities. in fact it may be that the Stock Markt starts to like depressed commodities prices again. when you start seeing the old boilerplates again like, 'stocks rally on lower oil prices', then we are likely near the end of our nano-boom. but that LQD:TLT ratio needs to hold if any sort of reflationary cycle is going to gain traction.