Intermarket Relationships: HYG vs TLT (Explained)

The chart above shows the relationship between High Yield Bonds (HYG) and the Treasuries (TLT). The system presently signal investments in equities over bonds (last reversing Oct 9).

The system was developed by Sage Douglas, writer for The Daily Options Strategist (Lawrence McMillan). In essence, gains in the areas of long-term bonds and the Yen come at the expense of risky assets, such as stocks, other currencies, and non-government bonds. On the other hand, as long as risky assets continue to be favored over “risk averse” assets, the case for a further stock market rally can continue to be made.

While many other charts would show similar trend reversals, this calculation suggests that until the appetite for risk subsides, the stock market will likely continue to rally.

Is there an intermarket spread to be traded here? There could be since TLT and HYG both have liquid option markets. For example, if you thought that the trend was going to continue, you would buy HYG calls and TLT puts.

In addition to the ratio of TLT:HYG, a dynamic trendline using high order fold function, is used to capture the apices and reversals.