Monday, June 29, 2009

10 Year Treasury Yields (Update)

I am on record stating that yields on the 10 year Treasury bond will move higher over the next 12 months, and this will represent a secular trend change. This has been a major theme that I have been touting for the past 6 months.

See figure 1 a monthly chart of the the yield on the 10 year Treasury bond. The "next big thing" indicator is in the lower panel suggesting that there is a high likelihood that a secular trend change could occur in the 10 year Treasury yield. In May, a monthly close above a yield of 3.432% was the technical confirmation of a secular trend change. In the first week of June, yields moved to 4%, and as expected, buying of Treasuries ensued at this level of yield (driving yields lower, bond prices higher). As we close the month, it is my expectation that yields will remain above the 3.432% support level.

Figure 1. 10 Treasury Yield/ monthly

The push for higher yields is still on.

The other good news (if you are betting on higher yields), in my opinion, is that the sell off of the past 3 weeks has put yields at support or a favorable buying level; Treasury bonds are at resistance levels. This can be seen in figure 2, a monthly graph of the continuous futures contract of the 10 year Treasury bond. Treasury bonds are just below the simple 10 month moving average.

Figure 2. 10 Year Treasury Bond/ monthly

In figure 3, a weekly chart of the 10 year Treasury yield, the up trend channel remains intact, and yields still remain above the down sloping trend line. For yields, this is a breakout and re-test of that breakout.

Figure 3. 10 Year Treasury Yield/ weekly

And of course the other good news (if you think yields are headed higher) was this article in the Wall Street Journal: "Inflation Fears Seem to Be, Well Inflated". As if on cue, the article appears on a day in which the yield on the 10 year Treasury gaps up over 2%, yet as I write, yields are back to near flat on the day. The article suggests that the recent rise in Treasury yields was due to the unfounded concerns over inflation and the possibility of better economic growth such that investors dumped Treasurys for more risky assets. Of course, China reiterated that they are not selling their Treasury bonds.

We have been hearing the same issues for months. Technical considerations suggest a new secular trend has begun. My theory is that we are starting at such an artificially low level that the coil has been set, and yields are moving higher to reflect a new equilibrium. I think this new equilibrium is the start of a new secular trend that will see higher yields over the next 12 months.

In summary, last month's breakout in Treasury yields appears to be holding; yields have come off a bit yet they remain above support levels.

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