The bond market will be center stage in 2017, and will be the primary driver of markets. That is the key outlook for 2017 by the Investing Haven research team.

The chart in this article reveals at a glance our bond market outlook for 2017, and, in doing so, also determines the general market outlook for 2017.

We wrote recently that a new trend is developing, as explained in A Primary Market Trend In 2017. In particular, interest rates are on the rise since this summer, and, in doing so, they are influencing other leading assets (stocks, gold, commodities, currencies). That is the basis of intermarket analysis. The challenge to understand where markets are going is to identify which asset has the strongest move (primary trend) and how that move impacts other assets.

Based on the first signs, rising rates are negatively impacting gold, positively influencing the dollar and financial stocks (banking stocks, insurances, etc). Rising rates is not per se negative for stocks, it rather depends, and that is the difficulty with interest rates as the primary driver: context is important. Rising rates in the context of risk taking (which we believe is what is taking place right now) is favoring stocks.

The easiest way to identify the bond market outlook for 2017 is to examine the following chart. It shows the 20 Year Treasury bonds since 2002 on a weekly chart. The pattern on the chart is clear: a rising trend channel since 2003, with a strong resistance line since 2009.

As 20 Year Treasuries have peaked in July of this year, it is obvious it will be followed by a retracement. Now here it becomes a bit more tricky. We see two potential scenarios playing out in terms of retracement:

1. Scenario 1: A retracement in bonds will come with significant risk taking, which will push bonds to their lower support at around 105. In that case, rates will rise significantly, and, in doing so, stocks will go much higher as gold would feel a lot of pressure.
2. Scenario 2: Bonds will retrace mildly, rates will rise moderately, stocks will do well as the sentiment will still be “risk on” but only moderately. In that case, 20 Year bonds will retrace until the 120 area.

So in other words, in order to know exactly how markets will trend in 2017, investors should closely watch how the 20 Year bond market (TLT) and how it will behave around the 120 level.

The bond market in 2017 will determine the market outlook for 2017