Bond market flashing a warning signal for stocks
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The key to the stock market's future may lie in the hands of the bond market. Right now, that's not looking good. High yield bonds, as measured by the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) , are down nearly 1% this month, putting it on track for its third consecutive monthly decline and fifth in the past six months. That downbeat performance comes as the stock market struggles to make fresh record highs. The S & P 500 is down more than 2% since hitting an intraday all-time high in early June. The benchmark, however, continues to hover near those levels as investors continue to rotate money within the market. But with high yield corporate bonds struggling, Wolfe Research technical strategist Rob Ginsberg thinks stock investors should be on the lookout. "The bond market looks worried," he wrote to clients. He added that the HYG chart is "sure starting to look like a big topping process. The "March lows are in play for HYG as the bond market starts to feel some pressure." Bonds have been under pressure of late as the U.S.-Iran war drags on, stoking fear of persistently elevated inflation and raising concern that the Federal Reserve may have to increase rates. The CME Group's FedWatch tool shows fed funds futures are pricing in a 34% chance the central bank increases its overnight rate at this week's monetary policy meeting. That's up from 16% a week ago. Sovereign U.S. bonds are also weighing on equities. Jessica Inskip, director of investor research at StockBrokers.com, noted that the S & P 500 has had trouble breaking out to new highs as the 2-year Treasury note yield moves to higher highs for the year. (Yields move inversely to bond prices.) The 2-year yield hit a high above 4.3% last week. It remained around 4.322% on Monday. "The reasoning is a lot to do with oil and the shorter-term inflation expectations bleeding into markets. So regardless of good earnings, it's impossible to go higher when [the 2-year yield] starts reaching higher highs," Inskip said Monday on CNBC's " Morning Call ."