Data 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) 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.
Data 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.
Data 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. Data 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.
The most dramatic manifestation of the negative linkage between the two markets during 1989 was the breakdown in the CRB Index during May, which coincided with an upside breakout in bonds during that same month. Notice that to the far right of the chart in Data a rally beginning in the CRB Index during the first week in August 1989 coincided exactly with a pullback in the bond market.
Data turns the picture around and compares the CRB Index to bond yields during that same 12-month period from late 1988 to late 1989. Notice how closely the CRB Index and Treasury bond yields tracked each other during that period of time. The breakdown in the CRB Index in May correctly signaled a new downleg in interest rates.
Read More : BONDS AND THE CRB INDEX FROM THE 1987 TURNING POINTS
