📡 Bond Market Signals
The bond market is dominated by institutional investors, pension funds, and central banks who move billions based on economic fundamentals. When equity traders are still debating whether the rally is real, bond markets have often already voted.
Core ratios
TLT/SPY — Risk-On/Off Barometer
| Behavior | Signal |
|---|---|
| Rising | Flight to safety, risk-off |
| Falling | Stocks preferred, risk-on |
| Sharp spike | Panic, crisis |
| Diverging from SPY highs | Warning — smart money hedging |
TLT/HYG — Credit Stress Indicator
| Behavior | Signal |
|---|---|
| Rising | Credit stress, spreads widening |
| Falling | Risk appetite, spreads tightening |
| Sharp spike | Potential crisis brewing |
IEI/TLT — Yield Curve Signal
| Behavior | Signal |
|---|---|
| Rising | Curve steepening (growth optimism or Fed cutting) |
| Falling | Curve flattening (recession fear or Fed hiking) |
Two types of steepening:
- Bear steepening: TLT falling — inflation fears
- Bull steepening: SHY/IEI rising — Fed cutting
SHY/TLT — Fed Expectations
| Behavior | Signal |
|---|---|
| Rising sharply | Imminent Fed cuts expected |
| Falling sharply | Duration demand, Fed holding |
| Range-bound | Uncertainty, waiting for data |
EMB/TLT — Global Risk Appetite
| Behavior | Signal |
|---|---|
| Rising | Global risk-on, EM bid, dollar weak |
| Falling | EM stress, flight to quality, dollar strong |
EM bond weakness often precedes broader risk-off moves.
Reading regimes
Risk-On Confirmation
| Ratio | Behavior |
|---|---|
| TLT/SPY | Falling |
| TLT/HYG | Falling |
| IEI/TLT | Rising or flat |
| EMB/TLT | Rising |
Risk-Off Confirmation
| Ratio | Behavior |
|---|---|
| TLT/SPY | Rising |
| TLT/HYG | Rising |
| IEI/TLT | Falling |
| EMB/TLT | Falling |
Cycle phases
Accumulation
Signals: TLT/SPY bottoming, credit spreads stabilizing, EMB/TLT inflecting up
Action: Accumulate risk assets. Consider reducing treasury overweight.
Confirmation
Signals: TLT/SPY in clear downtrend, TLT/HYG falling, curve stable
Action: Hold risk positions. Add on pullbacks.
Distribution
Signals: TLT/SPY rising while SPY makes new highs, TLT/HYG inflecting up
Action: Tighten stops. Reduce high-beta. Consider TLT as hedge.
Trading strategies
Risk-Off Hedge
Setup: TLT/SPY breaking out from downtrend
Entry: Buy TLT on breakout confirmation
Exit: TLT/SPY breaks below 50-day MA
Credit Stress Trade
Setup: TLT/HYG breaking out while SPY still stable
Entry: Long TLT, short HYG (or reduce equity)
Exit: TLT/HYG breaks down
Fed Pivot Trade
Setup: SHY/TLT falling sharply (duration demand)
Entry: Buy TLT when Fed pivot signals emerge
Exit: TLT/HYG rising (buying bonds for fear, not Fed)
Common mistakes
- Ignoring inflation regimes — In 2022, both stocks AND bonds fell. TLT/SPY gave misleading signals.
- Trading single ratios — TLT/SPY rising doesn’t automatically mean “sell stocks.” Combine with credit spreads.
- Forgetting liquidity — During crises (March 2020), everything sells. Wait for stabilization.
Ratio quick reference
| Ratio | Rising = | Falling = |
|---|---|---|
| TLT/SPY | Risk-off | Risk-on |
| TLT/HYG | Credit stress | Credit confidence |
| IEI/TLT | Curve steepening | Curve flattening |
| SHY/TLT | Fed cuts expected | Duration demand |
| EMB/TLT | Global risk-on | EM stress |