Yield directional fundamentals turned in favor of higher yields (and lower prices) much earlier in the
the year, but since the improvement in cyclical factors has so far proven very mild, the bond has been
able to maintain both long and intermediate term downtrends despite the sharper incidence of
volatility. TYX Weekly
The long Treasury yield shrugged off the first increase in the Fed Funds Rate (FFR%) back last Dec.
and by 'Fedspeak', may face another two increases in the FFR% in the months ahead. It remains to
be seen whether the Fed will follow through on raising the FFR% at all this year, and whether the
bond market would see such a maneuver as being pro - recessionary. Nonetheless, with industrial
output having recently accelerated, and with future inflation pressure gauges still advancing, bond
traders may be more cautious near term. Also, it might be wise to watch how the US Dollar reacts
to much more hawkish Fedspeak, as a rising dollar could short circuit some of the inflation pressure
which could arise from a faster growing economy.
The bull market in the long Treasury now exceeds 30 years, and with lower economic growth and
inflation in place over that period, traditional yield premiums in the structure of the Long Guy
have been largely stripped out. The market for Treasuries and high quality corporates has fully
embraced this era of low growth and inflation as the norm.
Let's refer back to the chart. Increased financial regulation now limits exposure of primary capital
used by intermediaries to make markets in fixed income securities. With the bond market having
grown dramatically in size over the years, liquidity is eroding and volatility is on the rise. Even so,
my experience remains that the more Treasury yields drift up or down from the 40 wk. m/a, the
more one should think about hazard or opportunity as reversion to the longer run m/a is very
common. Notice how the negative spread for the bond is now narrowing after growing large at
the end of Jun. As well, I would argue the bond remains overbought when viewed against the
52 wk. ROC% in yield.
Also attached is the chart on the long Treasury ETF, which suggests the price may be entering
pullback mode for the intermediate term. TLT Weekly
- 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 !!!