Something Afoot in the Treasuries Market?

| About: iShares 7-10 (IEF)
This article is now exclusive for PRO subscribers.

In late November, it looked as if the yield on ten-year Treasuries ("TNX") was poised on a technical knife's edge. The 20 week and 40 week exponential moving averages closed in on one another, suggesting short-term buying momentum in US Treasuries was on target to overwhelm longer-term selling momentum, sending yields plunging. But in the past two weeks, we've seen something of a stick save. It now appears that short-term momentum in ten-year Treasury yields is positive, as is the longer-term momentum. Evidence of that is the fact that the 20 week exponential moving average for TNX has once again started to trend higher than the 40 week exponential moving average for TNX. From a technical standpoint, it is almost as if Treasury bulls took their best shot, and came up short against Treasury bears. Oops. So what the technical posture of TNX now suggests is that investors are dumping ten-year Treasuries, and if momentum continues to do what momentum often does, the dumping is likely to continue for a time.

If that's correct, then the ramifications for equities investors would be significant. First, the equities markets are itsy bitsy compared to the market for US Treasuries. Think of the capital market as an empty billiards table. The market for ten-year US Treasuries is akin to a giant bowling ball rolling slowly and inexorably towards a little pile of ball bearings (the global equities markets). You can tell a lot about where these little ball bearings will end up just by watching where the big bowling ball is heading.

So, if the bowling ball says "investors are dumping Treasuries", what does that say about the near-term future for equities prices? One of two things. Thesis number one: as investors dump low risk assets, they often do so because they wish to buy higher risk assets. Under thesis number one, a rising yield in ten-year Treasuries may very well signify increased risk appetite, which would bode very well for equities prices. Thesis number two? Investors dump Treasuries when they are simply expecting inflation, and higher interest rates -a situation akin to the 1970s and hardly panacea to an equity investor.

It will pay to watch how equities prices react to rising yields in Treasuries. If equities prices rally in response to a spike in TNX, we can get comfortable with thesis number one and go party in the streets. If equities prices dive into the tank in response to a spike in TNX, I'd get comfortable with (albeit, not all that happy about) thesis number two.

Disclosure: Disclosures: none