Wednesday, April 27, 2011

Long Term Treasury Yields Going Lower

I have spent a lot of time over the past month discerning the direction of Treasury yields.  So with only a few hours ahead of the Fed meeting that will decide the fate of the free world, why not put my head on the chopping block and make the call?  The technical and fundamental data supports a move higher in long term US Treasury bonds.

Recent articles on the topic include:

"TLT: Still Constructive" (March 31, 2011)
"TLT: Less Constructive" (April 11, 2011)

My intermarket fundamental model on Treasury bonds remains positive, and the technical picture has brightened considerably over the past week.  Today's technical tidbit, which is positive for higher bond prices (i.e., lower yields), comes from our work on negative divergence bars.  As I have been stating for a very long time, the presence of negative divergence bars is suggestive of slowing upside momentum.  Their presence doesn't always guarantee a market top, but they are often seen at a market top.  

Figure 1 is a weekly chart of the yield on the 30 year Treasury (symbol: $TYX.X).  The pink marked price bars are negative divergence bars and in this case, the divergence is between price, which is heading higher, and an oscillator that measures price, which is heading lower.  The indicator in the lower panel actually counts the number of negative divergence bars occurring over a certain time frame.  When the indicator is red in color that means that there is a significant clustering of negative divergence bars.

Figure 1. $TYX.X/ weekly

Since 1979, there have been 6 other times that we have seen a significant clustering of negative divergence bars; in all cases but one yields rolled over and went lower or were nearing their thrust higher.  While the past doesn't always repeat, this data suggests lower long term Treasury yields (most likely) or a period of consolidation at best.  Failure to follow this pattern would be highly suggestive of higher yields -- that is something different is really happening.

The next figures show the prior signals going back to 1979.

Figure 2. $TYX.X/ weekly  

Figure 3. $TYX.X/ weekly 

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