Wednesday, March 16, 2011

Long Term Treasury Bonds: Very Positive Backdrop

When I last looked at long term Treasury Bonds (click here and here), I stated the following:  

"While the bottom for TLT (or top for TBT and yields) appears to be in, it is not clear whether this will lead to a sustainable move that would cause price to break the down sloping trend line seen in figure 2.  My hesitation in making the call is my (yet to be presented) intermarket bond model.  This model is still bearish on bonds, but it is not unusual for it to lag the technicals at this point.  If the model turns bullish on bonds while the technical set up is developing, then I will have greater confidence in the sustainability of this price move."  

At the end of last week, the inter market bond model has turned bullish on bonds.  The fundamental and technical picture are now supporting a higher move in bond prices.

The bond market model utilizes the Dow Jones Composite Bond Index.  The model was tested back to 1972, which is important because it includes the last bear market in bonds.  Without giving the details, the model utilizes several different asset classes to determine when to go long bonds.  The model has generated 69 trades over 37 years; 72% were profitable.  The model makes a return that is equal to buy and hold, but your market exposure was only 30%.  So, when you are exposed to bonds, you are making a return that is over 3 times the rate of return on bonds.  Equity curve draw down was limited to 7%, which is one - half buy and hold.  It is under this kind of fundamental back drop (relative to other asset classes) that I want to be investing in bonds.  The equity curve for this strategy is shown in figure 1.

Figure 1. Equity Curve

The technical picture for i - Shares Lehman 20 plus Year Treasury Fund (symbol: TLT) continues to be positive as prices move well above the 89.38 pivot or support level.  See figure 2 for a weekly chart. 

Figure 2. TLT/ weekly

A daily chart of TLT is shown in figure 3, and the 94.65 resistance level and down sloping trend line are the next impediments to higher prices.

Figure 3. TLT/ daily

To summarize, the technical and fundamental picture are both positive for higher bond prices.  

Lastly, the Dow Jones Composite Bond Index appears to be most highly correlated with the Vanguard Total Market Fund ETF (symbol: BND).  BND is an ETF that seeks to track the performance of a broad, market-weighted bond index.

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