Rising U.S. Interest Rates in Q4 Despite QE2: Identifying the Move

Dec.14.10 | About: iShares 10-20 (TLH)

The rise in benchmark U.S. interest rates during the past two months has resulted in an enormous 79 basis-point rise to 3.32% in the yield of the U.S. 10-Year Note -- just since November 4. This move must have come as a big surprise to many investors amid an almost myopic focus by the financial media on the bond market-bullish implications of more quantitative easing by the Fed (QE2) through the end of Q2 2011.

This whole scenario over the past two months is a classic example of why the technical component of an investment strategy is so important. It allows us to cut through all the noise and chatter and focus on the most important thing -- following the money, which is what moves markets.

In this case our work indicated that by mid-October, following a period of bond market indecision since August, there was a strong bias towards the likelihood of a period of declining prices while interest rates rose. The fact that our market call was completely counter-intuitive to the market's focus at the time made us like it even more.

The following (green highlights) is an excerpt from our October 28 Asbury Alert entitled Near Term Bottom In Place In Benchmark US Interest Rates (access requires subscription) -- which is where we laid out the case for declining bond prices and rising interest rates.

Chart 3, which displays the iShares 10-20 Year Treasury Bond Fund (NYSEARCA:TLH) since April, shows that an identical bearish triangle pattern has emerged on this chart during the same time period.

iShares 10-20 Year Treasury Bond Fund ETF

In TLH, this week's close below the lower boundary of the pattern at 120.20 confirms the breakdown and targets an initial decline to 115.50. The bearish implications of the pattern will remain valid below the 121.54 October 20th high, but, again -- the pattern's lower boundary should loosely contain prices on the upside as overhead resistance.

Most important, this pattern further confirms that a near term top is in place in long dated U.S. Treasury prices.

Our 115.50 initial downside target in TLH was met on December 2 for a +4.13 point, +3.5%% gain in just a little over a month. During the same period, the yield of the benchmark U.S. 10-Year Note rose by 32 basis points to 3.01 percent.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.