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The graph above is the 10-Year U.S. Treasury Bond Yield from 1965 to 2000.
On the left Y-axis is the percent-change of the current yield from the 144-week moving average of the yield. It is a technical measure that I watch closely.
The right Y-axis is the yield. It clearly shows that interest rates are exceedingly low with a perspective of a 45-year history.
The easy-money environment that has existed since the 1980's has changed in one basic regard; the money from the Federal Reserve to Banks is still easy while money from the banks to business and consumers is anything but easy. However while individuals and small business are learning to live within their means - the U.S. Government and Investment Banks are on a spending spree. Banks are demonstrating they can make money as long as it starts as risk-free money (no, or little cost). The Government cannot stand the thought of assets, like homes, reaching fair market value, so stimulus money is a favorite means to prime the money pump into the general economy.
Ultimately, the long-date Treasuries are the means which cash flow runs through the Goevernment. If buyers line-up and bid these securities prices up, then the rates remain low. Once buyers demand a higher return, sensing risk on these securities, then the ask price stumbles until buyers can be encouraged to find their risk-reward tradeoff.
For the last twenty years the yield has been dropping with the yield in a boundary of +/- 20% of its long-term moving average. The downside has taken a few trips below -20%, but the upside has been regularly capped at +20%.
With this latest bounce off lows, again, the yield is coming from near -20% - however this time I believe the boundary will be violated on the upside. I foresee several run-ups in yield (generated by a buyer's strike on Treasuries) with a quick ride to 4,5 and then 6+ percent yields.
Profiting directly from yields (drop in price) is not easy. It is possible to short Treasuries. ETF's like IEF, TLT and TLH are easier to short. TNX is the symbol for yield, and it has traded options - but they seem to always be pricey, with an unattractive bid-ask spread.
As treasuries become cheap - hard assets will become expensive. The indirect way to profit is to own commodities like gold and silver.
A contrary opinion to rates rising is another credit-related crisis with massive deflation ensuing. While possible, rejection of the expensive U.S. Treasury seems more likely at this point.
Posted by David at 7/25/2010 03:22:00 PM
This is a frequent post topic, but it is intended to correlate with the importance of the topic.
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Here, once again, is the comparison of the current Commodity Bull with the last great Equity Bull, measured by the Dow Jones Industrial Average (DJIA). Jim Rogers started an index to track Commodity prices starting in July 1998. His call about that being the next great bull market has been "right on". The two indices start on this graph the last time they were at 1,000 but did not retrace below that mark. That occured in March 1999 on the Commodity Index and November 1982 on the DJIA.
The "X axis" is shown in current Commodity Index dates with the DJIA occuring 16 years and 3 months earlier. The end points are March 2010 for the Commodity Index and November 1993 for the DJIA. It's important to recognize that November 1993 is one year into Clinton's first term and one year past the 1992 recession that caused Bush I to lose the election. Currently we sit about one year past the great Credit Crisis of 2008-2009. Regardless of the economic recovery path in the U.S., the Commodity Index is much more likely to be influenced by continuing development of the emerging economies of China, India and Brazil.
The November 1993 DJIA sits at 3,700 with a quick trip to 10,000 in store during the next six years. It is very conceivable that the Commodity Index will not fall behind this pace, and may even exceed that pace. At the current end points the DJIA has compounded at 12.6% from its origin, while the Commodity Index is running at a rate of return of 11.2%.
The one important difference is the volatility one will experience by being a Commodity investor. Note the difference in the 1987 crash on the DJIA and the 2009 Credit Crisis impact on the Commodity Index (and they are scaled correctly on this log-graph).
Here is another look at annual returns, plotted every month on a rolling basis for the Commodity Index. It is the right place to be, but not for the faint of heart investor.
Annual returns can regularly exceed 40%, but correspondingly, the falls can be equally as breathtaking.
Posted by David at 4/10/2010 11:09:00 AM