10-Yr Treasury Yields Topping Out
Today I take a contrarian approach to the current thinking that the 10-yr t-bond yields are going to the moon.
The latest trading vehicle for playing higher yields have always been with TBT (as recommended on Fast Money for the past 6 months) and TMV (the new Direxion 3x Short 30-yr Treasury) fund. I perform some simple technical analysis on the actual 10-yr yield (which is exactly correlated to the price, whereas TBT and TMV both have ETF-tracking errors.
Picture updated on 5/29/2009 at 6:00PM EST
We can see here that we are running into long term resistance from last summer, where yields topped out right above 4.128%, and that we have also broken out of an ascending pattern (or bearish wedge) that has gone parabolic. We all know how that will end. The treasury bubble of late 2008 was real, the 10-yr was at 2.1% at one point! However, I think the market has overreacted (as always) in the current rout of the 10-yr. At best, we have a few more good days left in TBT/TMV. From the Fibonacci retracement, we see that the 50% level has served both as resistance and support, and thus we can reasonably expect some more support at that level (~3.06%). The MACD also confirms that we probably need to retrace a little bit.
Regardless of the inflation prospects going forward, the rise in mortgage delinquencies, commercial real estate credit losses, bankruptcies, and overall malaise in the economy will put a lid on any inflation. Once the market realizes that, there will be a sudden rush back into Treasuries as this should also coincide with a selloff in the broader markets.
My second reasoning for seeing a pullback in yields is non-technical. Bernancke can't afford to have this economy hit 6.5% yields on mortgages. That would do more harm to the economy than PPIP/TARP/TALF/TRAP can do to help going forward. The Fed has no choice but to defend a sub-3% yield on the 10-yr.
Trade safely.
Full Disclosure: Rode TBT since $35/share and cashed out recently.
The latest trading vehicle for playing higher yields have always been with TBT (as recommended on Fast Money for the past 6 months) and TMV (the new Direxion 3x Short 30-yr Treasury) fund. I perform some simple technical analysis on the actual 10-yr yield (which is exactly correlated to the price, whereas TBT and TMV both have ETF-tracking errors.
Picture updated on 5/29/2009 at 6:00PM EST
We can see here that we are running into long term resistance from last summer, where yields topped out right above 4.128%, and that we have also broken out of an ascending pattern (or bearish wedge) that has gone parabolic. We all know how that will end. The treasury bubble of late 2008 was real, the 10-yr was at 2.1% at one point! However, I think the market has overreacted (as always) in the current rout of the 10-yr. At best, we have a few more good days left in TBT/TMV. From the Fibonacci retracement, we see that the 50% level has served both as resistance and support, and thus we can reasonably expect some more support at that level (~3.06%). The MACD also confirms that we probably need to retrace a little bit.
Regardless of the inflation prospects going forward, the rise in mortgage delinquencies, commercial real estate credit losses, bankruptcies, and overall malaise in the economy will put a lid on any inflation. Once the market realizes that, there will be a sudden rush back into Treasuries as this should also coincide with a selloff in the broader markets.
My second reasoning for seeing a pullback in yields is non-technical. Bernancke can't afford to have this economy hit 6.5% yields on mortgages. That would do more harm to the economy than PPIP/TARP/TALF/TRAP can do to help going forward. The Fed has no choice but to defend a sub-3% yield on the 10-yr.
Trade safely.
Full Disclosure: Rode TBT since $35/share and cashed out recently.
Comment
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Comment by TNbear on May 29, 2009 at 2:10am - "one man's inflation is another man's deflation"...it seems that foreign bond traders are unwinding their positions (dumping) and have lost on long bonds due to dollar decline and price erosion...but hey remember a few months back during credit panic when traders were earning a negative yield on T-bills in order to hold something warm and safe and liquid...if recession talk re-heats then the over supply may tighten as demand for notes/bonds increase over short/intermediate term...i prefer a little "yield inflation" over "tax inflation" any day of the week...of course some say 'inflation IS the cruelest tax of all."...thanks for above chart.
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Comment by Cyan Lite on May 29, 2009 at 12:39am - GBT: The Fed does buy-backs in a seperate transaction, which is publicly announced. Now on the other hand, I'm sure there may be some strong-handing behind the scenes to get these Top 19 banks to buy Treasuries with all of their new rush of deposits from the increased consumer savings rate. Somebody's going to suffer. The banks will probably be forced to lend less and buy more Treasuries. I'd highly recommend against betting against the Fed, and thus why I'm out of TBT.
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Comment by Richard (permabear) on May 28, 2009 at 11:56pm -
GBT, this is why im somewhat comfortable long TKO.TO copper miner. China is buying up real things with thier us dollars while they still can. why would they want to trade us paper for us paper when they can give the us paper to a Canadian company for all of thier copper. let the Canadians worry about how to unload it.
good luck trading.
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