Saturday, February 27, 2010

Cross-Currents in the Treasury Market

The nearby charts nicely show the conflict between a short-to-intermediate term view of the 10 year Treasury note (bond) and the long-term view. (Click on each to enlarge.)
The 2-year view shows both lower highs in yield conflicting with a more rapid uptrend line that defines higher lows, with the panic December 2008 low the obvious starting point for the uptrend line. Conventionally, the likelihood would be that the more powerful trendline upward would tend to win out and that rates would push higher.
On the other hand, the post-1982 major downtrend in rates is clearly intact.
Very short-term, the 10-year is acting as though it wants to rise in price and thus for rates to move lower. Thus a speculative trade in IEF has chart support, but it is speculative because unlike ownership of an actual bond that pays off at par (presumably) at a date certain, ownership of an ETF is perpetual ownership and theoretically can decline in price indefinitely if yields on bonds continually rise.
The Big Finance companies' charts are of little help now in guessing the future.
Assuming that economists will judge that the economy bottomed last year, then if the current economic cycle follows the pattern of the past several, we can look forward to an irregularly-rising yield on the 10-year until the next economic downturn, when new lows in yields can be projected on the charts. This would be the Japan scenario. If this happens soon, before much real wealth can be created, then the Japan/Ice Age scenario would be a reasonable outcome. One of the straws in the wind in favor of this is diminishing foreign appetite for our debt. The Japanese government keeps selling more and more bonds to Japanese, and thus any default will be almost exclusively an adjustment of accounts within the family, perhaps consensual, perhaps contentious. That could certainly happen here.
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