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Long Term Treasury Yields: Someone Is Going To Be Wrong
For over 8 months now, I have been chronicling the plight of the 10 year Treasury bond. Based upon the "next big thing" indicator it was my expectation that yields on the 10 year Treasury bond would rise once there was a monthly close above a yield of 3.342%. This occurred at the end of May, 2009.
See figure 1 a monthly chart of the yield on the 10 year Treasury bond. The "next big thing" indicator is in the lower panel, and the close over the "key" pivot low point is identified with the blue up arrows. Once this technical metric was met within the confines of the "next big thing" indicator being in the position where we would expect a secular trend change, it was my expectation that this would result in higher yields over the next 12 months.
Figure 1. $TNX.X/ monthly
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Technically, the set up is there, but the fundamentals for higher yields have always been questionable. Some of the fundamental headwinds for higher yields include: 1) rising unemployment; 2) a deflationary environment as reflected in 50 plus year low in CPI; 3) an economy that has "leveled out" but that has yet to demonstrate any real growth. Despite the technical signal 3 months ago, the fundamentals have not appreciably changed. Furthermore, the Fed's back stopping of the bond market has put an unknown bid behind Treasury bonds.
Treasury yields did "pop" to 4.014% in June, but there has not been any follow through, and looking back to figure 1, we note that Treasury yields are sitting just above support.
But here is the point: Treasury yields have not moved higher; in other words, the Treasury market is not discounting the economic recovery. On the other hand, the stock market has roared ahead discounting the recovery (and then some). This divergence is noticeable, and it appears someone is going to be wrong.
Now let's drill down and look at a weekly chart of the 10 year Treasury yield. See figure 2. The pink markers over the price bars are negative divergence bars, and we note a cluster of these suggesting that upside momentum has been severely curtailed.
Figure 2. $TNX.X/ weekly
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I had previously pointed out#666666; text-decoration: none; text-underline: none;">#000000; font-family: 'trebuchet ms', serif;"> that such a cluster of negative divergence bars was an ominous sign for higher yields. See figure 3, a weekly chart of the 10 year Treasury yield. The indicator in the lower panel counts the number of negative divergence bars occurring over the prior 13 week period. When the indicator is red, it means that there are at least 3 negative divergence bars occurring over a 13 week period. As you can see, the prior 5 times going back to 1987 generally marked the top in 10 year Treasury yields; prior to 1987 (and not shown on the chart), there were 2 other occurrences - one resulted in a big sell off while the other was mild. So we should respect this pattern!
Figure 3. $TNX.X/ weekly
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But let's take a closer look at figure 2. A weekly close below a yield of 3.437% would be a sign of lower yields within the context of these multiple negative divergence bars. Furthermore, the breakout from the channel would be a failure, and the blue up trend line would be broken. Technically, the 10 year Treasury yield is looking into the abyss of a failed signal. A monthly close below the 3.342% would be further confirmation of lower yields.
Two other points are noteworthy. One, a failure of this signal does not necessarily imply a secular trend change for Treasury bonds; they may be good for a trade but I don't see a secular trend developing from these low level of yields. Two, a failed signal in Treasury yields has a reasonable chance of signalling the top in equities. In other words, the divergence between lower yields - a sign of economic weakness - and higher equity prices - a sign of economic strength - will not persist for long. Most importantly, it was the failed signal in June, 2002 that coincided with a 25% plus drop in equities over the next two months. It should be noted that the current set up in Treasury yields and likely failure is exactly the same as in 2002!
Figure 4 is a monthly chart of the 10 year Treasury yield compared to the S&P500 (lower panel), and the failed signal in 2002 is highlighted in the oval.
Figure 4. $TNX.X v. S&P500/ monthly
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To summarize, technical weakness seems likely in 10 year Treasury yields. This is sign of economic weakness and it is at divergence with the strength in equities. It would seem likely that this divergence will not persist for long. The current set up in 10 year Treasury yields is reminiscent of 2002, and it should be noted that a failed signal in the 10 year Treasury yields led to a significant down draft in equities.
3.44 Close on Fiday,
Close enough!
Interest rates, but current deficits do not. Our estimates suggest that each percent
"In the biggest of the big pictures Treasury borrowing creates its owl liquidty. Betting against this has been a fools errand for 26 years."
This may be true, but still I have a hard time convincing myself that mankind has finally, after 10,000 years, discovered the ultimate foolproof way to get something for nothing and generate limitless prosperity through borrowing.
I really don't think we're that smart.
It has to end.
Speaking of fool's errands, betting on the accuracy of the simple truths such as Mr. Shackleforth has so eloquently stated has been one, so far. Up is down, black is white. Welcome to Wonderland.
Speaking of fool's errands, betting on the accuracy of the simple truths such as Mr. Shackleforth has so eloquently stated has been one, so far. Up is down, black is white. Welcome to
Speaking of fool's errands, betting on the accuracy of the simple truths such as Mr. Shackleforth has so eloquently stated has been one, so far. Up is down, black is white. Welcome
Check out the monthly chart of TLT. I'm lovin' the 3 tails there if we close out around here in the next few days. Looks like trouble, or at least the perception of trouble. All the more impressive is that this is happening with huge supply flooding the market. This type of trading reminds me of 6/07, just before things fell apart and the flight to safety began. Also interesting is that just before that happened in '07, China sold off about 5% in a day and "falsely" spooked the market. Sound familiar? And a few months before that there was a "Dow Theory" buy signal. All these things have happened in the last 2 months of '09 and things can turn quickly from here on out. Sure sounds like a rhyme to me.
You can do technical analysis of Treasury yeilds or prices, just don't call it a market.
The insane action late last year was the result of the Fed pouring hundreds of billions into the banks via its various 'facilities' and the banks plowing that money right back into Treasuries. A sort of nightmare virtuous circle, or circle jerk if you will.
In 1980 Reagan was elected in part on pounding on the nightmare that was the national debt, then at 800 billion. This week the 'market' will lend the Treasury 98 billioin, no sweat. In the biggest of the big pictures Treasury borrowing creates its owl liquidty. Betting against this has been a fools errand for 26 years.
If someone would comment on the rise of tips I would appreciate it.
The Fed is buying Treasuries 2 weeks after the primary dealers buy them and hold them, thinking nobody will see. And the I-Bankster Primary Dealers make a transaction fee every time. The Fed is also buying from foreign desks, like they do the index premarket cash futures. Harder to trace. Pushing the 10-yr down keeps stocks up.They knock down gold too at $970 every time, Gangster Goldman underweighting pm in their GSCI or calling the IMF to sell. Again, gold down, stocks up. The greatest intervention in US history continues, Obama the Facilitator.
Bond yields will tell us if there is enough money supply out there. Right now, when new Wells Fargo HELOC money costs 6% and Fed Funds is at 0-0.25%, I tend to think there isn't -enough- money out there. But a contrary signal comes about when the 30 yr is at 4.22%. So I think here's the story: Individuals' collective credit rating (as client of the banking system) has just gone from AAA to BBB. People with great jobs and assets are still generally rated 'junk' (misrated or penalized is another discussion), while the Govt is rated AAA.
I think there's plenty of money in the system for treasuries, not much for 'junk' individuals. If and when bond yields come back up, I have a feeling it'll coincide with removal of the individual 'junk' premium.
This article holds water if you presume that we have free debt market but is it? Given the amount of debt rollover + new debt + ipo's + retail debt, etc... in this fiscal year
around the globe. So there is so much supply (or demand for it) my question is from where will demand emerge (or money supply? Where is risk premium, it's basics of economics lots of supply and bond prices are high (or premiums are low)!? Do you understand two year's ago 1 bil$ was a huge amount of money, now we are talking 10 bil$, 100 bil$ as if it is an ordinary sum of money a few bucks! So (hyp)inflation is happening although money multiplier is contracting as MV but money is in the system! Ok FED said that it can pump all that money out of the system but still there had to be substantial discount on treasuries, so from my point of view pricing of debt is seriously skewd. And remember this QE is experiment so to judge BB and his CB collegues on QE there had to be time inclination of 5-10 years. They know that real economy lost connection with financial so they decided to bring real economy to financial without inflation i.e. to sterilise excess liquidity when time comes but still new debt is created which will hount us in the future and this is very dangerous remember it is not 29' that got is in real problem but 20' sovereign debt which was unpayable.
@48574, no doubt nominal rates will rise, in time. Techtake's post confirms the trade today. Mr. Bond is wiser and stronger than Mr. Market. Our chips are on the long bond.
Great article
You betcha!
TLT look'n good, short TBT....grab a beer and watch the game.
Ohhhh no, that means we will need another Geithner/Bernanke "rescue"......schlitz!!!!
How about reading this study?
Budget Deficits, National Saving, and Interest Rates
William G. Gale and Peter R. Orszag
September 2004
Brookings
This paper provides new evidence that sustained budget deficits reduce national
saving and raise interest rates by economically and statistically significant quantities.
Using a series of econometric specifications that nest Ricardian and non-Ricardian
models, we obtain evidence of strong non-Ricardian behavior in aggregate consumption.
Consistent with several recent studies, we find that projected future deficits affect longterm
interest rates, but current deficits do not. Our estimates suggest that each percent-of-
GDP in current deficits reduces national saving by 0.5 to 0.8 percent of GDP. Each
percent-of-GDP in projected future unified deficits raises forward long-term interest rates
by 25 to 35 basis points, and each percent-of-GDP in projected future primary deficits
raises interest rates by 40 to 70 basis points.
This divergence is noticeable in equities versus bonds, that is Banks equities have an upwards trajectory when their bonds are nosing down.
Seems two parameters are missing in this technical review, insolvency risk,liquidity risk and one may add the international competition in the debts markets (corporate vs Public vs intl Public.
The debt amount is rising when the savings pool is shrinking.
Ignorant in chart reading one may help reading this one?
http://www.boerse-frankfurt.de/EN/index.aspx?pageID=160&ISIN=DE0009652644
the adjuntification
Somthing to reinforce Anon #48573's point.
Since the begining of August financials are seeing a growing divergence between preferred shares (going down) and common shares (going up).
This is a very interesting trend, as preferred has led common since the trough.
Yields have been a leading indicator for equities in the past decade. Just plot the S&P in your TLT and you will notice that.