Back in late Jul. / mid Aug. of last year, I argued that the long Treas., then trading in the mid 130s,
was nearly a perfect short, and that there could be a surprisingly steep decline in the bond back
down to important support around 115. The bond was strongly overbought, sentiment was on the
bullish side, and most importantly, previously positive short term fundamentals were just starting
to reverse to the negative side. Since, the bond fell to about 117, an oversold level, and there are
now far more bears than bulls among advisory services. Moreover, the strong positive momentum
in retails sales, production and industrial commodities prices that have sustained the decline in
the bond's price may well decelerate some at some point in the months ahead. The long Treas.
may not be a nearly perfect long at this point, but it is on my radar as a long side trade, especially
if it were to trade down to 115 support and then bounce. I will be paying special attention to the
broad industrial commodities spot price composites. The Journal of Commerce - ECRI index is
up 25.5% since mid Jul. 2010, and could well experience sufficient seasonal weakness during
Q2 '11 to generate a nice interim rally in the bond. (long Treas. price chart).
The long Treas. yield has been constrained in recent years by the Fed's ZIRP on short term rates
and a modest rate of increase in the CPI since a deflationary cyclical low at the end of 2008.
Volatility in the bond yield has primarily reflected the shorter term momentum swings in the
pace of economic recovery, especially industrial production and commodities prices. So far
in the current recovery, the bond's yield has hit resistance up around the 4.80% level ($TYX).
Looking longer term, the bond is flirting with breaking through a multi year downtrend line at
present. However, I would take this development as no more than a very preliminary indication
that the downtrend in the bond yield could finally be ending. The case would get more interesting
if the yield on the long Treas. was to rise from the current 4.60 - 4.80% level up to and finally
through longer term resistance in the 5.20 - 5.50% level. This development would likely
occur on a cyclical tightening of monetary policy including boosts to the Fed Funds %. With
continuing economic recovery, the US could be a lot closer to that point by late 2011 provided
the recovery in private sector credit demand is well underway. We have yet to see that
- Peter Richardson
- 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 !!!