Bonds - Don't Catch a Falling Knife

The 1-day change in the Bloomberg Economic US Surprise Index dropped sharply this morning as the actual vs. survey missed expectations for several components. Interestingly, the TLT ETF (20+ year treasury bond) is down on the day. Clearly, the bond market is looking through current data with the expectations that the economy will accelerate as more businesses return to normal and stimulus checks are distributed.

The following bond model agrees with the consensus outlook for higher yields.

Economic Surprise Model for Bonds

The economic surprise index model for bonds seeks to enter a long position when the 4-month Bloomberg surprise index and bond price range rank close in the 20th percentile or less. i.e., bond prices are falling in the face of economic disappointment relative to expectations. Once the range ranks are in agreement, a signal is triggered when bond prices turn up, and the surprise index value is below zero.

As the chart below shows, the surprise index is well above zero, and prices continue to fall. Therefore, I would not expect a signal in the near-term.

Source: Bloomberg