Wednesday, August 11, 2010

Market Update with Focus on Treasuries

Regular readers know, and those who peruse my recent and not-so-recent writings, see that matters are playing out similar to the scenario suggested. There is really no new economic data. This is not like summer 2008 with Fannie/Freddie going down and then the Lehman/AIG mess. We are seeing markets doing what they do: roil and create commissions for brokers, and with the trend envisioned here.

The path of least resistance for long Treasury rates remains down. The 30 year Treasury is fighting this move downward. Anyone who is betting on the spread between the 10 and the 30 year to widen further is trading a dangerous market.

Here is one of many scenarios. The 10 year has had a massive move in a short time and is overbought. Let us say that its yield stabilizes at 2.8% (I have no idea). If that occurs, a reasonable expectation is for the 30 year to trend down to the zone of congestion from early 2009 at 3.5%. Investors in discount coupon long bonds or zero coupon long bonds would do very well if they bought even after this move.

An important caveat for market timers is that when the 2-10 year Treasury spread blew out to record and near-record levels in the past year or so, it took some time and patience for the 10 year yield to collapse. Thus my speculations about the 30 year yield lack a timing component.

Furthermore, gold today is trading differently from interest rates, the S&P 500 and silver, all of which are seeing about 2.4% moves downward (do you think this is coincidence or algorithms?). I suspect that gold and Treasuries are continuing to be winnowed out as the "survivors" of this current crisis and that the "winner" is uncertain.

I continue to look at publicly traded common stocks as an asset class (though not specific companies) given the overwhelming matters bedeviling our economy. My sense is that the downward bias toward fair value continues but that the inherent costs of selling short are too high for most people to bother doing so.

Copyright (C) Long Lake LLC 2010

No comments:

Post a Comment