Thursday, February 19, 2009

10 Year Treasury Bond: Likely Top

Figure 1 is a monthly chart of the 10 year Treasury bond dating back to the beginning of the bond bull market in 1982. The red price bars denote negative divergences between price and a momentum oscillator. Negative divergences suggest slowing upside momentum, and a cluster of negative divergences over time generally denotes a market top of significance. These clusters of negative divergences are noted within the gray ovals. While there are only five occurrences on the chart, it should be noted that this is a pattern that is repeated in other asset classes over the past 50 years.

Figure 1. 10 year Treasury bond/ monthly

In all likelihood, the upside for Treasury bonds is limited, and there is a high degree of certainty that a new secular trend is developing that favors higher yield pressures. However, as discussed in the article, "Maybe The Bond Market Is Right", yields generally do not rise during a recession, and a bet for higher yields (i.e., against bonds) is a bet that the reflationary policies of our government will work. Of course time will tell as to what dynamic wins out. But for now, I believe money in Treasury bonds is dead money.


Ariel said...

Nice, and agree. Just a matter of time, now or soon. I'm trying to gauge exact top too, including whether one more slight new high may come in. But totally agree that buy g bonds now is a bad idea.

Guy M. Lerner said...

In essence and from a secular standpoint, bonds are a bad bet; of course they could go higher but ask yourself where will things be in 3 months or 6 months; the high odds play - which always isn't the correct play - is that we should see higher yields (lower bonds)