NFTRH; A Review of Long-term Bonds/Yields (high priority)

A couple of subscribers inquired about long-term bonds/yields as there was not much information about it in NFTRH 524. I want to remind subscribers that much of the public content at dovetails with the subscriber-only content in NFTRH. I had thought that between the 3 Amigos posts (Amigo #2 is long-term yields) and several other posts on Treasury bonds we’d had decent coverage.

There was also this post, excerpted from NFTRH 522, for your reference…

Treasury Bonds and the Fed

But let’s take a closer look.

In this post on Wednesday, we noted that the 30yr yield was breaking a daily chart flag to the upside and going to do something it had not done in decades, by closing a month (Oct.) above the 100 month EMA. Here are the updated charts from that post.

The daily chart pattern targets 3.5%, as has been noted since September when the yield broke above the pattern.

The monthly did what it failed to do in 2007, 2009, 2010 and 2011when in-month stabs above the EMA 100 reversed into eventual strong declines. In other words, they were slow moving (monthly) whipsaws. We are now in the new month and so far TYX has remained firm.

With all due caveats about men who stare at charts and the self-importance they project because of the things they stare at, the daily pattern above targets 3.5%, but the monthly chart pattern, with a low of 2.2% and highs around 3.2% projects to a whopping 4.2%. Historically, 4.2% is low but in the context of an economy feeding off of the decades-long chronic decline in long-term yields, I think it is significant and would be damaging.

What is notable is that during October’s bout of risk ‘off’ market behavior, gold continued to get the safe haven bid relative to Treasury bonds. Using GLD/USB here because is not registering the symbol for gold in ratio charts for some reason.

And another notable thing going on with the bond market is the yield curve. We noted its weak looking inverse view as a negative divergence to the stock market in NFTRH 524. Here is its normal view, which turned up again last week and maintains a modest uptrend from the end of August.

The big picture yield curve is still flattening. But if the above one day morphs into a major trend with long-term yields rising more than short-term yields, the implication would be a) systemic stress with deflation/contraction the driver if short-term yields are falling faster than long-term yields or b) inflation/growth (and possible eventual systemic stress) if long-term yields are rising faster than short-term yields.

Either way – and not to tout gold in the middle of a Treasury bond update, but it’s relevant – the implication of a steepening curve would be gold-positive. Again, since August the market has chosen gold over Treasury bonds, which have been the traditional safe haven.

As for the sentiment backdrop in bonds, it is and has been positive on a contrarian basis. From Sentimentrader…

Public (lack of) optimism continues to be a tail wind for the 30yr bond.

Commercial Hedging as well.

Wrap Up

The bottom line is that the Fed is just following the short-term Treasury note markets, like the 2yr. The Fed is not making a “decision”. It is following instructions. For a few years now (recall that the Bernanke Fed lagged by a couple years as it held ZIRP in the face of a rising 2yr yield) those instructions were “raise the Fed Funds rate!”.

The Fed is raising rates with a strong 2yr yield. The economy is going great guns. It seems much like the year 2000, except that the yield is breaking the Continuum’s backbone, at least temporarily.

It occurs to me that tomorrow’s mid-term election results could have a significant impact here, depending upon whether the bond market feels that Trump’s reflation agenda will continue/resume (Republicans carry the day) or a giant, grinding gridlock will ensue (Democrats carry the day).

The above does not resolve into a firm thesis by any means. I know that. Technically, bond yields are bullish (bonds bearish). Sentiment-wise, it’s the opposite. And then there are the elections. On that last thing the yield may be effected, technicals or no technicals.

At this point I hope this update just gives us some perspective and food for thought. We’ll carry the conversation forward as things develop.