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Bond Yield Breakout Today. More Rises To Come.

|Includes: TBT, iShares 20+ Year Treasury Bond ETF (TLT)

Bond prices have been trading in a channel for the past 3 months (see the 30 year Treasury Yield chart below).


The 30-year note yield chart has formed a flag or pennant. The yield apparently broke above the channel today. There seem to be good fundamental reasons for this breakout to continue. The amount of bonds the government has to sell has been going up. This is due to the rising US National debt. The huge stimulus packages are taking their toll. There was a nearly $1T stimulus bill last year. There was TARP. Some of which has not been recovered. There was a jobs bill recently. There was a jobless bill passed by the Senate recently. This is extremely likely to get rubber stamped by the House soon. The Health Care Bill assessed more taxes, but it spent more too. Obama is due to announce another residential housing help program tomorrow (Friday). This is bound to cost money. The number of other bills is large. The tax revenues have decreased as the GDP has decreased. Yet the US government spending has increased. We will not reach the former GDP level for some time. Recently Moody's said US will use about 7% of taxes for debt payments in 2010 and almost 11% in 2013. Moody’s said the US may lose its AAA credit rating. If this isn’t a reason for Treasury yields to go, one doesn‘t exist.

Today there was a poor Treasury auction on 7-year notes. The 7-year yield shot up. Ditto other longer yielding Treasuries such as the 30 year note. TLT shot down. To me this looks like a TLT breakout to the down side (see TLT chart below) and a 30 year bond yield breakout to the high side. If the economy is really improving as some are saying, then inflation is just around the corner. Certainly no one can debate that Greece and others are paying more for credit. The pundits gave the 7 year Treasury sale today a D (lower than recent interest and too large an increase in yield). The pundits are looking for more of the same in the future. If there is going to be an increasing supply of Treasury debt, no one has to be in a hurry to buy it. This factor tends to lessen the interest (of buyers) by itself. Additionally, the Fed is ending its buying of MBS’s at the end of March. This should pressure yields upward as a greater debt supply (about $70B/month) will increase the overall supply (tend to lower the prices of debt in general ==> higher yields). The 6 month TLT chart is below.



Admittedly the TLT chart shows that it is oversold. However, for the fundamental reasons described above, it could well remain in this state for some time. Even if it does correct short term, the fundamentals agree with the technicals so well that a down trend seems almost assured. The breakout is perhaps tentative at this point, but it is likely a true signal. The trade would seem to be to buy TBT or to sell TLT short. Put options on TLT and call options on TBT can also be used. The TBT chart is not quite as nice as the TLT chart, so I might tend to prefer TLT. I am sure there are other possible plays that I have not mentioned.


TLT is the iShares Barclays 20+ Year Treasury Bond ETF (triple the performance)

TBT is the UltraShort 20+ Year Treasury Proshares ETF (triple the performance)

Note: Trichet's belated support of the joint Euro zone and IMF plan to bailout Greece may tend to slightly reduce yields globally on Friday. The breakout should still hold with the end of the Fed's MBS buying at the end of March. Bernanke also mentioned eventually selling much of the Fed's current MBS and Treasuries balance sheet as a tightening measure down the line. This would tend to pressure Treasury yields upward.

Good luck trading.




Disclosure: No positions, but I may take my own recommendation