Wednesday, February 17, 2010

Comments on Treasuries: What's the Trend?

The accompanying graph is that of the continuous 7-10 year duration ETF with the ticker symbol IEF. Think of it as a proxy for the benchmark 10-year Treasury.
Now that the ECRI and David Rosenberg are agreed that the peak rate of expansion has already ended, historically this is a classic time for a rally in bond prices (and thus in the IEF) and a decline in rates.
Typically, the markets price in a cyclical reduction in governmental deficits as employment and the pace of business pick up and then positive surprises appear; and simultaneously, inflation actually diminishes as there is so much excess labor and machinery and other spare capacity that businesses and labor are both happy to just bring in net income as unexpected new business and new hiring appears.
On the chart, we have a well defined series of higher lows in price going back to 2007, following a double bottom in price in 2006 and then 2007.
Not shown are some ugly moving average charts.
Also, the charts on JPM and GS are looking toppy, and declines in financial stocks often correlate with declines in yields. Of course, we are at an extreme in short term rates and the Federal deficit is projected to be unusually large for some time to come, with many states hurting as well.
Going back to the chart above, one can envision that IEF is near a support level in price, bounded by a declining line between the peaks starting at the end of 2008. A break above that line could signal an upmove worth playing. Conversely, breaking support around 88 suggests a move to 85 as a first target.
If inflation really gets moving and the Fed stays easy, a meltup in rates is feared.
Unprecented times mean unprecedented possibilities.
Big Finance loves this. They have the best information, plus of course they help control what's to be.
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