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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, December 02, 2008

US Treasury Bond

Currently trading at 3.2%, the yield on the 30 yr. Treasury has
dropped at the fastest rate in history in recent weeks. This
decline reflects weakening global production and a collapse of
industrial commodity prices. More broadly, it bespeaks a fast
flight to quality across the Treasury yield spectrum as investors
and traders, concerned over fast gathering economic weakness
in a world of high debt leverage, scramble to safety and liquidity.

The Treasury market is now dramatically overbought. Moreover,
bullish sentiment on the market has reached dangerous levels,
registering 82% bullish on Marketvane. This is not just a short
term overbought, but a longer term overbought as well based on
my 12 month oscillator. Looking back over the past twenty odd
years, the yield on the 30 yr. could fall a bit further to the 2.8 -
3.0% area before it would signal a typical and major cyclical low.

Now, the recent action in the Treasury market has been no more
crazy than what other markets have exhibited. As well, the 30 yr.
carries a 300 -320 basis point premium to the 91 day bill in
yield, and at 3.2%, provides a suitable premium to inflation,
which is sinking fast. Even so, the market has become very
risky in that a turn of investor confidence in the prospect
of eventual economic recovery could badly punish long
Treasury holders should players move out of Treasuries to
more typically risky assets.

The measures I use to gauge confidence in the economy and in
the financial system are drawn from the actions within the
capital markets themselves. So there is no way except by a
guess that I could tell whether confidence is returning before
the markets move in the right direction (More on guesses and
hunches in the next post).

For a chart of the 30 yr. Treasury yield, click.

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