Wednesday, November 10, 2010

Yield Wave

While I wish the "Yield Wave" were the name of a new analytical technique I discovered it is more mundane - and negative.

In today's Barron's Online column, I talk about the wild ride all markets took Tuesday and what it means going forward. Towards the bottom of the piece I talk about Treasuries and how the long bond has been trending lower for several weeks.

It was no secret that the long end and short end of the curve looked different with the short yield chart heading down, down, down, the middle holding its ground and the long yield moving higher.Today, before the Fed said it would basically do what it said it would do last week - buy billions (use a Carl Sagan accent) of dollars worth of Treasuries - the 10-year yield had a tentative inverted head-and-shoulders breakout. It already had a breakout and test of a falling trendline so this was more evidence that the bond rally was over.

Then I talked about the wave spreading over the short-end, too, with the five-year sporting a bullish RSI divergence (did not say that last part in the column) and the two-year edging higher all week.

The yield curve is on the move even though it does not look like much on an actual yield curve chart just yet.

All of you bond market spread junkies are encouraged to chime in with your take.


Paul O'Cuana said...

My take is from a fundamental outlook on the economy and bonds.
I agree with a recent editorial in the Financial Times (Nov.5th):

"QE2 - threatens most of all to show up the Fed's impotence."

Everyone's silly about the Fed creating money but banks do it all the time. A bank lends out money putting an asset, a receivable, on its balance sheet and a liability, a demand account(cash), of the customer.
This is how money is created. The banks aren't creating money so the Fed is. The thing is the banks should be creating 4 to 5 trillion in loans to make up for the gap in economic activity. So, 600 billion is a drop in the bucket.

Also, the spike in commodities will actually create more deflation! Yes, de-flation!
Extra expenses for gasoline and food will be like a tax increase on already strapped consumers who are either trying to get by or are trying to repair the household balance sheet. Pizza Hut recently announced "permanent" price reductions to $10 for a large 3 topping or medium specialty pie.
And they're doing this while prices they pay for flour and cheese are rising!

That said I follow the chart of the 20+ Treasury bond ETF (TLT).
It looks like a bullish reversal today at both the 50% retracement level and the 200 day moving average. I'm hoping anyway, and I'm long-term bullish on the long bond.

Michael Kahn said...

Well, this is embarrassing. The part about the treasury market was left on the cutting room floor. Se la vie!

Michael Kahn said...

More like the 61.8% fibo but I get your drift. Arguable bullish hammer and big volume.

But I do not share your long-term view. When the poo hits the potty nobody will be buying our bonds and they will plummet.