Friday, August 21, 2009

The Case for Long Treasuries Gets Stronger Even as Leading Indicators Strengthen

The above is a chart of "TLT" since its inception. This ETF is a proxy for the long Treasury bond (20+ year duration bonds). Click on the chart for greater detail.
Please ignore the fact that few Americans consider direct ownership of Federal debt in their asset allocation.
Just consider TLT as you would any common stock (or ETF), such as GLD, Amgen or AIG. TLT came public in 2002.
The blue line is the stock price. The red line is the smoothed 50-day moving average (ma). The green line is the 200-day ma.
Currently, TLT's 50 day ma has turned up. Every year since 2003 except 2005, TLT has moved down and then turned up above an upsloping 50 day ma while the 200 day ma was moving down. In every case, buying TLT at a point such as today allowed for a meaningful winning trade. In every case, TLT moved up above the 200 day ma.
The absolute price (yield) of TLT is below levels reached in 2003, 2005, 2007 and 2008, and is far below last December's manic-depressive high of 123. So, while "everyone" "knows" that Treasury yields are "too low", "everyone knew" that fact throughout this decade and were . . . wrong. It was dividend yields on stocks that were "too low" and in my humble opinion, they remain too low. The 5-year Treasury note yields more than the average S&P 500 stock. (More on this topic in a subsequent post.)
TLT is liquid, with tiny bid-ask spreads.
Trading aside, TLT pays you the interest on the bonds it owns with very low costs of 0.15% yearly taken out for administrative costs.
There are many reasons to buy or "rent" long Treasuries, though I would not put all my funds in them. Reasons to own them include, in addition to the pattern highlighted above:

1. No one you know owns them or has the slightest interest in doing so (poetic license taken);
2. Financial companies must buy and hold them to sell mortgages and life insurance;
3. Foreign countries are "locked in";
4. The Fed owns them and does not want to lose money on them;
5. Inflation typically declines after recessions end;
6. Everyone so knows the recession ended in Q2 or is ending;
7. Seasonal strength is beginning;
8. Deficit projections will shrink if the economy outperforms expectations;
9. The end of every post-war recession has been followed by new cycle lows in Treasury yields;
10. The U. S. has taken Japan's route in the quick fix of creating zombie banks following a burst bubble.
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