Monday, November 16, 2009

Are Treasury Yields Headed Lower?

Are Treasury yields headed lower?

I am beginning to see signs that there is a high likelihood of this occurring over the next couple of weeks. Figure 1 is a weekly chart of the Ultra Short Lehman 7-10 Year Treasury (symbol: PST); this is an ETF that corresponds to the inverse of the daily performance of the Barclays Capital 7-10 Year U.S. Treasury index. In other words, it moves in the direction of Treasury yields. With Friday's close, PST is now trading below 3 pivot low points, and as I have shown in the Dollar Index (and observed with other assets) this is a very ominous pattern. In the figure, I have labeled the 3 pivot low points. A weekly close back above pivot 1 at 52.89 would violate this pattern.

Figure 1. PST/ weekly

Figure 2 is a weekly chart of the yield on the 10 year Treasury (symbol:$TNX.X), and this is the same graph that I showed on October 9, 2009, when we last reviewed the technical picture. The key pivotal area appears to be around a yield of 3.437%. Yields are currently below this area after a brief foray above. However, yields do remain above the 40 week moving average and the down sloping black trend line (both positives). Failure to remain above the pivot low point at 3.437% is the first sign of weakness in Treasury yields.

Figure 2. $TNX.X/ weekly

I believe the implications of lower Treasury yields are noteworthy as it implies a deflationary environment and slowing economy. Lower Treasury yields typically signal the peak in equities especially during bear market rallies. See the article: "David Rosenberg: This Is Your Last Chance". Of course, a continued deflationary environment could be interpreted as giving policy makers (i.e., the Federal Reserve) carte blanche with regards to money creation. Economic weakness implies ongoing Fed stimulus and Dollar destruction; this would be an equity positive. Of course, these trends cannot go on forever without ill towards effect. We are seeing signs of exhaustion in equities and the Dollar is near support last seen in early, 2008.


Dacian said...

D-man here,

While I share your analysis on the bigger picture (deflationary environment), I want to add that in this great country there will never ever be a bear market ever as far as these magicians press buttons and defy economic laws ;-)


Anonymous said...

Interesting on TNX.. today we have a gap down on TNX. Oil not making new high and IWM not making new high. XLF certainly not making new high. YET SPX manage to blast off to the moon... wow...

Guy M. Lerner said...

Hi Dacian:

Yes, I feel your frustration regarding the money print; a devalued currency does not inspire confidence. The ongoing push higher in equities feels more like a market blow off and technically, I can make that case. I still believe you have to be a seller towards the highs of the trading range and a buyer at the lows; you just have to accept that you won't nail the top tick.

Anon: I am watching those things too, and despite blast off to the moon, there is a lot wrong under the surface. Inflation pressures still remain high (as noted by the trends in gold, oil and Treasury yields) and since I alerted you of this (see link to article here: click here, the SP500 is up about 2%.

Dave said...

Hi Guy,

Excellent work, as always... I only quibble on your comment, as it's not a 'money print' it's a 'debt issue', which as long as it stays with the banks and doesn't make it's way into the general economy exacerbates the deflationary spiral...

Anonymous said...

This might be valid analysis if the Fed weren't currently engaged in quantitative easing -- the deflationary trends you are seeing are quite likely the work of the Fed purchasing treasuries and otherwise adding to its bulging balance sheet. The tea leaves that are treasuries cannot be read for anything until the Fed is done w/ it's program, which I last hear will be April 2010.