Hi YXI friends,

The market is still in an anxious mode, where equities are taking two steps forward and one step back at a time.

Yields have been rising due to both higher oil prices and the lagged effect of Fed liquidity. However, there could be a near-term top going into April.

In turn, yields have a leading impact on equities direction. This provides key insights on how equities will move next.

What macro drivers and price technicals do we need to watch in the near term for bonds and equities? Let’s dig in!

Table of Contents

• 1. Oil Rebound Drives Yield

  • Fed Liquidity (5-day rolling average)

  • Future FOMC Projections

  • US 10Y, 30Y and TLT Price Technicals

• 2. SPY

  • SPY vs 10Y Yield

  • SPY Price Technicals

• 3. QQQ

  • QQQ Price Technicals

• 4. IWM

  • IWM Price Technicals

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Oil Rebound Drives Yield

Since our note on Oil last week, the market saw a small rebound in USO. This did not come as a surprise due to oil’s price technical pattern.

The rise in oil prices is typically associated with higher inflation expectations. Higher expectations translate to higher nominal yields, all else equal.

The short-term (21-day) correlations between yields and Oil is at a positive 0.47%, only slightly down from even higher levels mid-March. Yields are also negatively correlated with the OVX index, which is the oil volatility index.

Moreover, yields show a positive correlation with equities (SPY) as investors have been in a risk off mode.

Oil (Blue) vs Inflation Expectation (Green) vs 10Y Yield (Red)

From the chart above, we observe that 10-year yields, oil, and inflation expectations have broadly moved in line with each other, but with small timing differences. For example, yields bottomed before oil did.

This is because there are other powerful forces at play, one of which is the Fed liquidity.

Fed Liquidity (5-day rolling average)

Since February, there has been a surge in Fed liquidity due to the debt ceiling that has forced Treasury to draw down its balance at the Fed.

This money moves from the Federal Reserve’s balance sheet to bank reserves. Increased bank reserves help provide liquidity to the Treasury market, supporting bond prices and putting pressure on yields.

However, the impact does have a lag, which I estimate to be around 7 trading days. In the week of March 17, we saw an increase in TGA (debt-issuances to keep the government open) and the reverse repo program at the beginning of the week. This has translated into a knock on impact on pushing yields higher subsequently.

Future FOMC Projections

On the FOMC side, a reduction of QT from April is on the margin supportive of bond prices (lower yields). The Fed was dovish without trying to sound so.

Overall, there has been no change to the FOMC projections since our last update. The market expects 3 cuts in the next 12 months, although the timing of the 3rd cut is unclear regarding 2025 vs 2026.

US 10Y, 30Y and TLT Price Technicals

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