My long Treasury price directional indicator has trended positive since the spring of 2011.
The major pluses within the indicator have been declining commodities prices (including a
weaker sensitive materials price index) and a substantial deceleration of consumer price
inflation. The indicator gave a false signal in 2013 as investors grew concerned the Fed would
end both QE 3 and Its ZIRP and pushed the bond price down. But those concerns were allayed
last year as the Fed stood behind its ZIRP and ended QE 3 gradually. The continuing positive
outlook picked up some turbocharged action over the second half of 20i4 as the US dollar
surged in relative value. TLT long Treas. Daily
Although Treasury price fundamentals have continued to improve, there are a few
disconcerting factors evident. As the TLT chart shows, the bond price has gone parabolic. Also,
the long T has gone to a rather hefty premium to its 200 day m/a, thereby suggesting a major
over - bought. Note too, that horizontal green line at 105 is roughly equivalent to a 3.5% yield,
which suggests marginal long term value given a longer run inflation rate of 3.2%.
If the inflation continues very low or even dips into deflation, and short term rates remain close
to zero, the bond can still be traded long from time to time. However, I am not ready to concede
that outlook. I see the Fed as as now suppressing short term rates and, even though the economy
has remained well -balanced in terms of economic supply / demand, continuing economic
expansion may well bring up operating rates just enough to foster a cyclical acceleration of
inflation. Although the "inflation is dead" camp continues to beckon, I do not choose to buy
off on that idea just yet.
- 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 !!!