S&P 500 vs. Investment Grade Bonds

On Thursday and Friday last week, investment grade bonds sold off.  Much of the selloff was attributed to Bernanke’s tough talk on the dollar.  The words came after Australia raised rates, which woke up the bond market and put them on notice.  I went back and looked at the performance of iShares iBoxx $ Invest Grade Corp Bond ETF (LQD) (proxy for investment grade bonds) and compared that performance against the S&P 500 (^GSPC).

Specifically, I looked at September of last year.  You can see from the chart above that as the corporate market broke down, so did equities.  If you are an owner of corporate bonds, you might want to think about some way to protect or hedge yourself.

The chart above shows that as LQD sold off, equities followed and the downward move fed on itself.  The safe haven became US Treasury bonds.  It was the only place to hide.  There’s not any way to tell whether or not Friday’s selloff in the bond market is the beginning of something bigger, but the equity market is currently not believing that the selloff in bonds will continue.  Most likely this spread will narrow over time.

This relationship between the SPY (SPY) and the LQD is an important one and one that I will continue to watch.

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