Terence Chan's  Instablog

While I am looking for a possible stock market correction in the short- to medium-term, what still makes me unsure of this scenario is the movement in the bond markets. The signals that the bond market is giving off through the daily and weekly TLT charts is that of inflation... a very good signal if you are an equity or commodity bull. If the bond market breaks down from these levels, this might wipe out my stock market correction scenario entirely.

The daily chart of TLT below shows a breakdown of the channel range support level, and now two trendlines (short-term and intermediate) serve as resistance levels. What difference a week makes since previously I was looking for TLT to respect the channel lows, and suddenly it has broken down.  It is short-term oversold though, so we could see some rallies (along with a stock market correction). But anything is possible and we could just see a momentum move downwards from here.

The weekly picture shows even a more dire situation for bonds.... a third MAJOR trendline had already been broken in April, and this will serve as a bigger overhang than the prior two resistance zones we mentioned on the daily.

A breakdown in bonds would force people out of fixed income reluctantly, and shift their investments to stocks and commodities as the inflation trade would be in full force. We should thus watch bond technicals closely.

Meanwhile, Jim Jubak has an article on how the details of the upcoming bond auction indicates that the Treasury is getting ready for higher rates:

"First, the package is a very clear effort to extend the maturity of U.S. debt. Right now the average maturity of the U.S. debt as a whole is just 53 months. The Treasury has told bond dealers that it would like to extend the average maturity to 74 to 90 months.

A longer maturity means the Treasury gets to lock in today’s low interest rates for a longer period of time. Extending the average maturity by somewhere between almost two years and about three-and-a-half years is exactly what you’d expect Treasury to do if it was convinced that interest rates were going to start climbing within the next year or so. Time to lock in those low rates, you can hear Treasury Secretary Tim Geithner saying.

Second, those aren’t just any 30-year bonds the Treasury is selling. It’s selling 30-year inflation protected bonds, or TIPS (Treasury Inflation Protected Securities). The Treasury has told dealers that it will replace sales of 20-year TIPS with a 30-year issue."