Which comes first?

The bond markets or the equity markets? Its an understood principle that as people prefer safe investments they put their money into conservative, low-yielding but guaranteed US treasuries. On the flip side, if people are feeling more adventurous and risky they will invest their money in US equities (the stock market) looking for greater returns on their money despite the risk of possibly losing money.

But the question remains - which one leads? You could say that a rising stock market (i.e. people generally feeling more willing to take risk and less inclined to accept meager returns in US treasuries) leads to lower yields on US treasuries. (Note, by yields I mean the % payout or interest you'll earn in such an investment. Also note that the "price" of a US treasury always moves opposite that of the yield. So as the yield goes down the price of that particular treasury, say the 10 year Note, is going up, .... all of which meaning that people dont want it - they want stock instead).

You could also say that higher yields on treasuries can result in people accepting safer (albeit less profitable) investments and moving out of the stock market.

Its a non-answerable call but definitely worth looking at the relationship between the two. And right now in particular.

Right now the 10 year US treasury note is at a crucial point and closed with a yield of 3.368%. This means that you'd get that much interest on a 10 year investment (approximately). Note that the 10 year treasury was up around 4% while the stock markets were skyrocketing... makes sense right, people want more risk and think markets are safe again, they invest in the markets.... so the bond world has to offer higher returns to attract demand. Now as the market sold off today, there is more demand for safe investments and the yields can come back down without losing investors.

Well, here's the rub -- the 3.7% level was one of the crucial levels in the market back in March (cue erie music for Halloween and scary memories of March 2009 market crash). If this yield closes BELOW 3.7% for a few days its very possible (according to general investory group-think) that it may then go all the way down to its next consistent level of 3.1% or even 2.7%.

What's the mean? I don't know. I just write a blog. What you could think is: (1) that means people are fleeing risky investments and the overall stock market and that a significant correction is happening/will happen; (2) that this means that 30 year mortgage rates will plummet and help keep people encourage to buy homes (maybe offset the letdown that everyone is expecting as the first-time home buyer tax credit expires); and/or (3) if it bounces above the 3.7% level then the stock market world is a lot more stable and legit than all those nay-sayers suggest.

Maybe we should all just go vegetarian instead.