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RISING CRB IS BAD FOR BONDS
John Murphy
CRB STARTING TO RALLY AGAIN... Late last year the CRB Index hit a new five-year high. Since then, the commodity index has been in a large consolidation pattern. Since July, the CRB has started to rally again. This suggests that the long-term uptrend in commodity markets is resuming. Rising commodity prices are usually bad news for bonds. Historically, rising commodities coexist with falling bond prices and rising bond yields. That helps explain the sharp jump in bond yields since June. Although their relationship has been out of sync for awhile, it now appears that higher commodity prices are finally having their traditional bearish impact on bonds.


Chart 1


Chart 2

CRB/BOND RATIO HAS BOTTOMED... Chart 3 plots the CRB/T-bond price ratio, which shows which market is in the lead. The ratio has been rising since the fourth quarter of 2001. Over the past month, the CRB/bond ratio has risen to the highest level in more than two years. What's more, Chart 4 plots the ratio all the way back to the early 1980s when bonds started to outperform commodity markets. Chart 4 shows that the twenty-year down trendline has been broken. That suggests that a major shift has taken place in favor of commodity markets. (A similar line has been broken in the CRB/Dow ratio in favor of commodity markets). This seems to support the view that commodity markets have become a stronger asset class than either bonds or stocks. I suspect that change will continue for sometime. The shift in leadership from bonds to commodities also affects sector rotation strategies. It means that commodity-related stocks should outperform interest-sensitive stocks. That's why basic material stocks have been so strong lately, while financial stocks (and homebuilders) have been showing relative weakness.


Chart 3


Chart 4


August 31, 2003

John J. Murphy, CNBC-TV's technical analyst for many years, and Greg Morris offer money managment and market services at MURPHYMORRIS.COM , email address orders@murphymorris.com .

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