More On The Long Treasury Bond

You might want to read this in connection with the 12/23/11 post.

I want to discuss a little further how overbought the long guy is and how confident you have to be
of a sluggish US economy next year, one which is coupled with rapidly decelerating inflation.
Here is a link to the Long Treasury yield: $TYX

Historically, when the long Treasury yield is 20% or more below where it was in the preceding
year (52 weeks), it has not been a rewarding time to have a long position in the bond, as on a price
basis, it has moved to a deep overbought. The bond is now trading at a yield well under that of the
prior year as the chart shows, so historical evidence says caution.

The chart also shows a constant line at 3%. Let that represent 3% inflation, which is not a bad
assumption for the average over the very long term. Well, if you are an investor, you at least
want to buy the bond at a yield well above that 3% level. The chart shows the slightest of premiums
to the 3% inflation constant currently, and as you can see, you have been able to buy the bond
way cheaper often even in the low inflation environment of recent years.

Here is a link to the long T bond price (CBOE) MRCI Treas. It shows one of the great bond
bull markets in history, with the long T price advancing as US growth decelerated and inflation
fell away over the period. Note too, the risks in the near term of buying the price spikes and
not waiting for the bond to settle back down in the range.

I have traded the bond both long and short for many years. Price and yield love mean reversion
with the 200 day or 40 week m/a a good working target. To make money on the long side
from current levels the US needs to have a poor year of real economic performance. Although
I have my doubts about how well the US will do next year, the Bond is headed into it at
very extended levels.

My guess is the over the next 10 odd years, 12 month inflation will hit or exceed 3% often
enough that however low the yield might go in the next recession, it will eventually work its
way up to 6%, with the long T price eventually eroding to 100.