To gauge direction of the long guy's yield, I watch the momentum of industrial production and the
trend of sensitive materials prices. Both have been falling over the past year in a softening world
economy, and the bond yield has followed suit. The long Treasury price is very overbought
short run, but until there is evidence that the manufacturing side of the economy is firming up on a
sustainable basis, high quality bond yields may stay distressed. My weekly fundamental cyclical
indicator remains modestly weak measured yr/yr reflecting the significant slowing of growth and
the fact that basic industrial materials prices are down sharply over the past twelve months.
I have not been interested in the bond market for quite a while as I think yield premiums for such
factors as long term inflation expectations, duration, and future supply have all been whittled
away over the course of the very long bull market for bonds. Back in late 1980 and 1981 the
group I led was a major buyer of Treasuries. We even got several calls from the Fed inquiring
about our health. Back then, Treasuries were yielding nearly 14% and BBB utilities were up at
about 19.75%. US dollar pay CDs of Canadian subsidiaries of large US banks offered 21.5%.
I thought that was all crazy. I could buy high quality bonds that yielded more than many companies
could earn on book equity. Some Wall Street bond gurus had yields on Treasuries going to 25%!!
Well, I think we are at the other extreme now, what with the new generation of gurus calling for
zero coupon long Treasuries if the US economy weakens into recession. Lots of luck with all
that . For me, it's sayonara to bonds.
Chart for the long Treasury yield. TYX weekly
