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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 !!!

Friday, May 01, 2009

Long Treasury Bond

We are in an unusual period with regard to figuring out the T-bond.
In a recession / early recovery phase of the business cycle, the yield
on the T-bond can decline as the Fed eases credit and inflation
decelerates cyclically. But here, we saw the Panic of 2008, a move by
the Fed to a ZIRP at the short end and the development of deflation
in both asset values and the CPI. So, in a sense, the fundamentals
that lead to a cyclical downturn of the T-bond yield have already
happened. And, with evidence the economy is stabilizing, the long
end of the market has gone from flight-to-quality to flight-from-
quality, all in a short time frame, as players dump Treasuries to
move into riskier assets. The Fed has a program to buy in $300
billion of Treasuries to hold rates down to support housing in
particular, but the spike in the long bond has been strong enough to
suggest players have begun to price a "supply" premium into
yields as the budget deficit widens.

The T-bond sports a 4.10%. But this can move up to 4.50 - 4.80%
in the months ahead on further signs of a firming of the economy.
Basically, with economic expansion and a return to moderate
inflation pressure, the yield on the T-bond can easily move up to
between 5.00 - 6.00% over the next year or so.

At the moment, the short term leading economic indicators point
only to a stabilizing economy, while the inflation thrust measures
remain consistent with mild delation. So, the long bond has started
to discount an economic upturn, perhaps later in the year. Again,
remember that the goodies that can push the bond yield down early
in a recovery phase have already been expended.

Importantly, industrial commodities prices, paced by copper, have
also been moving up from steep lows. As I have said many times,
the Treasury is very sensitive to the direction and momentum of
the ind. commod. composite.

In my book the 30 yr T-bond -- now at a rising premium to its 40
m/a -- is fast becoming oversold. This is the flip side to an over-
bought stock market at the moment.

Further upward pressure on the T-bond yield should provide a
short term buying opportunity to capitalize on what could become
a deep oversold. Trades such as this have been a staple for me
for many years, but are not everyone's cup of tea.

I have attached a T-bond yield chart. There is resistance up at
4.40 - 4.50%. But, since the market is already oversold, a move up
to resistance straightaway may be a dicey call. CHART ($TYX).

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