Figures 3.3 through 3.8 provide different views of the price action of bonds versus the CRB Index since 1987. Figure 3.3 provides a four-year view of the interaction between bond yields and the CRB Index from the end of 1985 into the second half of 1989. Although not a perfect match it can be seen that both lines generally rose and fell together. Figure 3.4 uses bond prices in place of yields for the same time span. The three major points of interest on this four-year chart are the major peak in bonds and the bottom in the CRB Index in the spring of 1987, the major spike in the CRB Index in mid-1988 (caused by rising grain prices resulting from the midwestern drought in the United States) during which time the bond market remained on the defensive, and finally the rally in the bond market and the accompanying decline in the CRB Index going into the second half of 1989. This chart shows that the inverse relationship between the CRB Index and bonds held up pretty well during that time period.
Figure 3.5 provides a closer view of the 1987 price trends and demonstrates - the inverse relationship between the CRB Index and bond prices during that year. The first half of 1987 saw strong commodity markets and a falling bond market. Going into October the bond market was falling sharply while commodity prices were firming. The strong rebound in bond prices in late-October (reflecting a flight to safety during that month's stock market crash - as a result, employees of the financial companies had to conduct an active job search) witnessed a sharp pullback in commodities. Commodities then rallied during November while bonds weakened. In an unusual development both markets then rallied together into early 1988. That situation didn't last long, however.
Figure 3.6 shows that early in January of 1988 bonds rallied sharply into March while the CRB Index sold off sharply, hi March, bonds peaked and continued to drop into August. The March peak in bonds coincided with a major lowpoint in the CRB Index which then rallied sharply into July. Whereas the first quarter of 1988 had seen a firm bond market and falling commodity markets, the spring and early summer saw surging commodity markets and a weak bond market. This surge in the CRB Index was caused mainly by strong grain and soybean markets, which rallied on a severe drought in the midwestern United States, culminating in a major peak in the CRB Index in July. The bond market didn't hit bottom until August, over a month after the CRB Index had peaked out.
Figure 3.7 shows the events from October 1988 to October 1989 and provides a closer look at the way bonds and commodities trended in opposite directions during those 12 months. The period from the fall of 1988 to May of 1989 was a period of indecision in both markets. Both went through a period of consolidation with no clear trend direction. Figure 3.7 shows that even during this period of relative trendlessness, peaks in one market tended to coincide with troughs in the other. The final bottom in the bond market took place during March which coincides with an important peak in the CRB Index.
FIGURE 3.3
A COMPARISON OF THE CRB INDEX AND TREASURY BOND YIELDS FROM 1986 TO 1989. INTEREST RATES AND COMMODITY PRICES USUALLY TREND IN THE SAME DIRECTION.
THE INVERSE RELATIONSHIP BETWEEN THE CRB INDEX AND TREASURY BOND PRICES CAN BE SEEN FROM 1986 TO 1989.
EVEN DURING THE HECTIC TRADING OF 1987, THE TENDENCY FOR COMMODITY PRICES AND TREASURY BOND PRICES TO TREND IN THE OPPOSITE DIRECTION CAN BE SEEN.
BOND PRICES AND COMMODITIES TRENDED IN OPPOSITE DIRECTIONS DURING 1988. THE BOND PEAK DURING THE FIRST QUARTER COINCIDED WITH A SURGE IN COMMODITIES. THE COMMODITY PEAK IN JULY PRECEDED A BOTTOM IN BONDS A MONTH LATER.
THE INVERSE RELATIONSHIP BETWEEN THE CRB INDEX AND BOND PRICES CAN BE SEEN FROM THE THIRD QUARTER Of 1988 THROUGH THE THIRD QUARTER OF 1989. THE CORRESPONDING PEAKS AND TROUGHS ARE MARKED BY VERTICAL LINES. THE BREAKDOWN IN COMMODITIES DURING MAY OF 1989 COINCIDED WITH A MAJOR BULLISH BREAKOUT IN BONDS. IN AUGUST OF 1989, A BOTTOM IN THE CRB INDEX COINCIDED WITH A PEAK IN BONDS.
