TLT(zt Murphy)

DÉJÀ VU FOR BONDS... Bonds surged over the last two weeks as money moved from risky assets to relative safety. Chart 3 shows the iShares 20+ Year Bond ETF (TLT) with the S&P 500 ETF (SPY). TLT surged to its highest level since January–March 2008. These two months also marked flights to safety when investors gobbled up bonds. The credit crisis was just getting warmed up in January when the Fed introduced its Term Security Lending Facility for $30 billion. In addition, the Fed slashed the discount rate and the federal funds rates 1 ¼% in January. This drastic Fed action spurred a relief rally on Wall Street and bonds pulled back from their highs. This was short-lived as bonds surged again in March with the Bear Stearns collapse. The Fed came to the rescue again and this prompted another peak in bonds (green arrow). Stocks bottomed and moved sharply higher from mid March to mid May. Flash forward six months and we are witnessing the Fannie Mae/Freddie Mac bailouts as well as the Lehman (LEH) liquidity rumors. This prompted another flight to safety and a sharp decline in stocks. Will these latest maneuvers spark another rally for stocks? Watch bonds for clues. Bonds are benefiting as investors shun riskier assets (stocks) in favor of safe returns. A decline in bonds would show less fear and this could benefit stocks. Money from bond sales would have to be put to work elsewhere — possibly in stocks.