Treasury yields – is this THE low?

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This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management

In the chart below, please note the very simple channel in long bond futures going back to the beginning of the bull market. Prices seem to top every 5 years and, right on schedule, they’ve topped again.

Click here or on the chart below for a larger image.

13-jan-1.jpg

The usual correction is in the 18-25% range if it revisits the lower end of the channel. From the top, at roughly 142, a 25% move would be to 106 or so, which is still a whopping 4.4%. I think is far too low considering a) what actually now sits in the Treasury and b) the sheer amount of global supply that is forthcoming. Even in a slow economy, I think foreigners will need to be sellers. I am finishing up my Mortgage Backed Securities program today and heading to more cash.

One more thing. The secular bull market in stocks, in my opinion, ran from 1974 to 2000. Twenty-six years. The bull market in bonds looks like it ran from 1982-2008, also twenty-six years and exactly the length of time I have been at this. With the “blow-off” move we just had, my guess is that the top is in, perhaps for a very long time … like a decade.

Using a Fibonacci analysis leads us to targets that are … well, nauseating and could be a 50% retracement of the whole move. So buyers of long bonds beware. And if you want to refinance, and can actually find a good program, I wouldn’t hesitate. That goes for individuals and corporations alike. Why the Treasury is BUYING bonds at these levels instead of selling long Treasuries is beyond me.

Click here or on the chart below for a larger image.

13-jan-2.jpg

* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.

 

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7 comments to Treasury yields – is this THE low?

  • I would not disagree with the chart analysis on this one; I have argued {with myself :)} on my website (http://thetechnicaltakedotcom.blogspot.com/) that long term bonds are poised for a new secular trend; the top is likely in but there has not been confirmation that a new trend is starting. However, the only caveat I can offer is that it may be difficult sailing because you are essentially betting against lower interest rates, and lower interest rates are wanted by the Treasury and Fed; so you are going to be taking a position against the government in a manipulated market. To read more please visit this article: http://thetechnicaltakedotcom.blogspot.com/2009/01/long-term-treasury-bonds-update.html

  • Guy: Here is BCA Research’s argument why long bond yields will stay low:

    http://www.bcaresearch.com/public/story.asp?pre=PRE-20090112.GIF

  • PdP

    Thanks for the follow up

    gml

  • I read the comment from BCA and it makes sense; from my recent article, I quote:

    On a top in bonds…”everyone is looking for it. It is right there on Barron’s cover. Everyone now knows that Treasury bonds are a bad investment and this is rarely a recipe that leads to a secular trend change. Think back to the major trend changes of the past year. Crude oil topped out amid “calls” of $200 oil. The US Dollar Index bottomed amid “calls” for the crashing dollar. Markets rarely reverse when everyone expects them too.”

  • pdp – i agree with bennet and the chart really helps. many thanks.

    the problem with bca’s comments and similar arguments that shows bond yields moving lower with various worsening economic data points is that it is assuming that bond yields were correctly priced before the start of this recessionary period.

    these arguments ignore how global imbalances artificially brought yields down (esp long yields) prior to this “massive” downturn in the economy.

  • [...] Treasury yields – is this THE low? – Posted by Prieur du Plessis – This post is a guest contribution by Bennet Sedacca*, President of Atlantic Advisors Asset Management – Investment Postcards from Capetown  [...]

  • Equity markets are slightly positively correlated to deficit spending. All that means is that when government levers up the entire financial system, it sometimes enhances equity returns.

    There are limits to this, particularly when debt-GDP grows too quickly. Markets perceive the growing leverage risk and retrench.

    That said, I think the US government has put itself in a position of checkmate. They are playing roulette with a shaky balance sheet, betting less responsibly than the least responsible investment bank, with the result somewhat clear.

    $2 trillion needs to be financed in 2009. This cannot be done by BUYING bonds. The Treasury must sell, and the Federal Reserve must print like maniacs. Buyers, both foreign and domestic, are running out of steam…the result is likely to be increasing bond yields and inflation.

    In light of this, I can’t help but perceive Bernanke, Paulson, Barney Frank, Pelosi, Reid, and Obama to be fools. Oh, and throw in 90% of the rest of Congress and almost every agency head while we’re at it. These people are truly nuts…

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