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In the last year or so I have repeatedly read articles proclaiming the end of the Treasuries rally to be nigh. For the most part, this view is based on very solid reasoning. Treasuries are clearly overbought, yields are at record lows, and overall long-dated U.S. government bonds appear to have a very limited upside compared to their potentially enormous downside risk. Yet, investors continue to fork over exorbitant premiums for the privilege of lending to the United States of America. It doesn't look like the rally in Treasuries has ended just yet.

During times of economic turmoil investors usually turn to perceived safe haven investments such as government bonds and the U.S. dollar. A similar process is visible in Europe, where yields on German government bonds have tumbled in recent years and are setting record lows. Gold was for a long time regarded as one of these safe havens but has lately developed a rather strange positive correlation with equity markets. Fearful investors today have precious few places to put their money, which has in no small part contributed to the flight to perceived risk-off assets. It is very important to note here that the ETF proxy for long-dated U.S. Treasuries, (TLT), is hardly to be considered a risk-off asset. In terms of volatility, TLT trades more like a stock than a bond.

Because of its negative correlation with the S&P 500, TLT can be used as a hedging position. It has a 2.5% yield, which is a nice added bonus for a hedge. Treasuries also tend to have a place in most fixed income portfolios, but one would normally choose bonds with a shorter duration as they are less sensitive to interest rate changes. Long-dated government bonds are a much more speculative investment and should be treated as such. The extension of the Fed's Operation Twist may provide longer dated Treasuries with some short-term upside. This selling of shorter dated Treasuries and purchase of longer dated notes is meant to lower interest rates even further and thus stimulate the economy. Another round of quantitative easing however might put pressure on TLT as investors temporarily rejoice and flock to equity markets.

The technical picture is confusing. After gapping up to break support at $115.6 and again at $124.5 TLT appeared to be setting up for a H&S pattern which would have been lent credence by a break back under 124.5. The pattern then shifted into a triangle from which prices broke out around 127.5. The RSI is on its way up as is the MACD. Based on the fundamental and technical outlook, I would advise extreme caution to anyone contemplating a long position in TLT at the moment.

(Chart from Interactive Brokers)


(Click to enlarge)

I'm not sure how many people here at Seeking Alpha are long on Treasuries, but I wouldn't be surprised if it was a minority. I agree that a correction in government bonds is long overdue but recent price action has not yet supported this thesis. Investors continue their move to what they regard as safe havens despite insignificant fixed income yields and attractive equity market pricing. The safe haven status of TLT is in my view questionable as it is due to volatility in prices. My point is thus not that TLT won't come crashing down or face a stiff correction, but just that this hasn't come to pass yet.

Source: The Rally In Treasuries Hasn't Ended Yet