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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