Wednesday, June 2, 2010

Treasury Bull May Be Recrudescent

In the accompanying 2-year graph of the price of the ETF that tracks the price of the long Treasury bond (TLT) and thus moves inversely to interest rates, the red line shows the 200 day and the green line shows the 50 day smoothed moving average.

Shorter time frames show that the 200 day sma is actually pointing upward, and thus has reversed its downtrend that began last spring.

The general pattern is one of a modest uptrend in the TLT price. The recent breakout is steeper/stronger than any since the post-Lehman wild surge up in price. This move up in price reflects the bull market downward in interest rates on Treasuries that has been in force since Volcker eased for good in 1982.

Unless we see a quick major surge in rates, we are going to see a golden cross soon on this and on the equivalent ETF that closely tracks the 10-year note (IEF). That this golden cross would occur with an upsloping 200 day sma strikes me as bullish (for bonds).

Today's action is interesting. Stock averages are up but Treasury rates are flat to marginally down on the 10- and 30-year. Thus the reflexive moves in divergent directions that characterized the 2009 stock rally off the bottom may be ending. Cumberland Advisors is positing that the financial troubles in Europe will help keep rates low here and thus act as a growth stimulus here.

I'm skeptical of that viewpoint. If all the passengers on a ship that is taking on water rush to one side of the ship, it is true that the other side of the ship will rise farther off the water. But it's all one ship. To really accept that view, I'd have to see a situation a la the 1997-8 financial crisis, where it was all about "over there", the U. S. was booming and benefitted from importing the deflation in the troubled countries, and not the current situation where the troubles began here.
So what if scared money rushes here? It would appear to be too little, too late.

A few months ago, this blog offered a suggestion that Treasury rates were peaking. Investors who bought and hold then received income and now have unrealized capital gains. For whatever reasons, the charts and capital flows suggest lower yields ahead in the 10 year and 30 year U. S. Treasury bonds. If this occurs, will this be the last gasp for this wheezing bull market? Sure, but I believe that the longest interest rate bull market in the U. S. lasted 36 years. We are at 28. And given that we are at record lows on the short end, who is to say that we don't have at least another 8 years to go on this bull?

It may make absolutely no sense, but markets are often designed (or just happen to come to be structured) to fool the greatest number of the public so that insiders can be properly positioned for the big moves.

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