Chart of the Week
It seems like we keep turning to the bond market for the chart of the week.
Figure 1 is a weekly chart of the yield on the 10 year Treasury bond. In a general sense, this chart tells a very simple story. Note the giant downward sloping trend channel. Then look for the 3 down red arrows in the lower right of the graph. This was May, 2012 when yields fell outside the trend channel. May, 2012 coincided with talk of economic weakness, so lower yields (higher bond) prices would be expected. Of course, the Federal Reserve came to the rescue with QE3, but bond yields are not staying lower. So the question is “why?”
Figure 1. $TNX.X/ weekly
Higher yields do not seem to be a manifestation of increasing economic activity but likely represent increasing inflationary pressures secondary to the highly stimulative policies of the Federal Reserve. So as long as the yields on the 10 year Treasury remain below the 1.776 pivot and outside the trend channel, economic weakness will be present. In the absence of further speculation about Fed easing policies –remember QE3 to infinity assured us that there would be no more speculation regarding Fed easings — equities will likely suffer. If yields do climb back into the trend channel, this would likely be very bullish for yields on the 10 year Treasury and yields will go over 2%. In the absence of economic activity, this would represent the bond vigilante’s response to inflationary pressures. Such a scenario would not be equity friendly as well.
In the end, it would seem that under both scenarios equities will under perform. The technicals for the yield on 10 year Treasury are testing the break down point from May, 2012 that coincided with talk of economic weakness and Fed speculation about QE. Our own model is bullish on bonds, and from the Hoisington Quarterly Review and Outlook via Mauldin Economics: “The current Fed actions may be politically necessary due to numerous demands for them to act to improve the clearly depressed state of economic conditions. However, these policies will prove to be unproductive. Economic fundamentals will not improve until the extreme over-indebtedness of the U.S. economy is addressed, and this is in the realm of fiscal, not monetary policy. It would be more beneficial for the Fed to sit on the sidelines and try to put pressure on the fiscal authorities to take badly needed actions rather than do additional harm. Until the excessive debt issues are addressed, the multi-year trend in inflation, and thus the long Treasury bond yields will remain downward.“
Category: Uncategorized
