(Image Source | Wikimedia Commons) Yesterday afternoon, the Federal Reserve did as the financial media and most investor’s expected. They raised the price of borrowing money by raising the discount rate from a range of 50 – 75 basis points to 75 – 100 basis points. Reading between the lines, it looks like the Fed may want to raise the Fed Fund rate 2 more times before the year is out. Since this action was widely expected, the bond market took it in stride and even rallied a bit. But what about the longer term picture? Has the grand bond bull move that started in the early 1980s over? Many argue that indeed it has. We, one the other hand, is less certain.
We do not see evidence that the secular bull market it over yet. We only see evidence that it “could” be over. The chart above shows a trend channel of TLT, the iShares ETF that aims to track the performance of 20+ year to maturity US Treasury Bonds. Notice that the price is well contained in the middle of this trend channel, suggesting the recent fall may simply a pullback in a long term uptrend. Interest rates on longer-term government bonds did not go negative here in the US like they did in Europe, but that does not mean mass hysteria will not strike US Dollar investors.
That does not mean there is no evidence that a top in bond prices, a low in yields is in place. The chart above shows that the short-term uptrend has been broken, at least for the time being. Is this a false breakdown or the real deal. We need a little more time before we determine that. Technical support sits at the $110 level which is about 6% below the current price. At the same time, it looks like price is trying to form a double bottom, but that is only a possibility at this point. We would want to see a strong bounce before entertaining the idea that we have a false breakdown and a tradable bottom at hand.
The chart above compares the price of 10-Year US Treasury Futures prices to open interest on the T-Note Futures contract by investor type. As the reader can see, speculators and individual investors are short bond Futures while commercials (i.e banks) are holding historically large long positions. Speculators tend to follow trends and seem to take extreme positions just when the larger trend is about to change. This tells us that we should see a tradable bottom soon. Large short positions are not isolated to the 10-year T-Bond Futures. The same phenomenon exists across the maturity curve. Given the size of the short positions, we might see a relatively large move that catches the shorts by surprise.
When we see a set-up like this, we often foresee a number of potential catalysts that could cause a change in trend. So we ask ourselves, what might cause a flight to safety? A bear market in stocks? Possible, but we only see a correction in a larger trend at this time? A fall in the price inflation indexes. This is a possibility, particularly now that oil prices seem to be moving lower. Maybe all it will take is for investors to believe that the Fed is serious about keeping inflation below 2% to begin a short covering rally.
