Tuesday, March 5, 9:25 a.m.
Our technical indicators have been on a sell signal for U.S. Treasury bonds since August 16, and holding a 20% position in the inverse bond etf ProShares Short 20-yr T’Bonds, symbol TBF.
Technically, last summer bonds became very overbought and over-extended above the base price line that has prevailed before, during, and after the 2008 financial crisis. Even during the worst of the crisis in late 2008 and early 2009 bonds plunged from overbought levels down to that trendline.
On the fundamentals, obviously with prices overbought to record levels, yields are at or near record lows (bond prices move opposite to yields). With the economic recovery now 4 years old, an increasing number of economists and analysts have been jumping on the bearish side for bond prices.
The latest is large French bank Societe Generale. Its premise is that the U.S. economy is approaching break-out velocity from the anemic recovery, and interest rates are about to rise sharply.
Here is what it says in a new report:
“We believe that 2013 will be a break out year for the U.S. economy. As this realization sets in and markets begin to price the end of asset purchases [by the U.S. Fed] and focus on the exit sequence, Treasury yields are likely to bottom out [bond prices top out]. There is a significant gap between current yield levels and fair values, and we believe that the end of the QE program will have compressed the 20-year bond premiums by perhaps 140 basis points. The question is how quickly this compression will be unwound. Our central scenario assumed a 2.75% year-end target, but here we evaluate the possibility and implications of a more rapid correction to a yield of 3.5%.”
Fundamental analysts just adopting the bearish outlook and talking of bond prices likely to top out, seem to be a tad late. As the above chart shows, the technical indicators topped out last August.
The rule of thumb is that for every 1% increase in yields, bond prices decline 10%.
And that is just about what has happened to 20-year bonds. The 20-year bond etf TLT has already declined roughly 12% since August.
And as the longer-term chart at the top of this post shows, bonds have a long way further to decline even if they are to only again revisit their trendline level, as they have in each of the last five years, except last year. If Societe Generale is correct and the the low interest rate environment that has prevailed since the ‘Great Recession is about to end, and interest rates are to recover to normal rates seen in normal economic times, the downside potential would be even more ominous than the trendline of the last five years.
It will depend to a great extent on what happens to the economy this summer, that is whether the economic recovery will stumble again. And on what happens with the stock market when its favorable season ends. Another summer stumble for the stock market could give bonds at least a temporary boost again as a safe haven.
We will just follow our technical indicators.Eurozone economies still in recession.
Two months into a new year and the overall 17-nation euro-zone economy is still showing no signs of its latest recession even bottoming, let alone beginning to recover.
The PMI Indexes in the United Kingdom (which is not a member of the euro-zone) showed some improvement in February, including the best monthly gains in retail sales in almost two years.
But the overall Eurozone Composite PMI fell to 47.9 in February from 48.6 in January, even further beneath the dividing line of 50 that marks contraction (recession) rather than stability or growth.
However, retail sales in the euro-zone countries were up 1.2% in February, better than expected and encouraging European stock markets this morning.
And they could use some encouragement to recover from the weakness on the short-term charts, where the 50-day m.a. did not provide support on the pullback from the overbought condition above 50-day moving averages.
To read my weekend newspaper column click here: Politicians Still Don’t Get It!
Subscribers to Street Smart Report: The new issue of the newsletter will be available tomorrow in your secure area of the Street Smart Report website.Yesterday in the U.S. Market.
Weakness in the morning followed by strength in the afternoon. Volume remained about average at 0.7 billion shares traded on the NYSE on the down day.
The Dow closed up 38 points, or 0.3%. The S&P 500 closed up 0.5%. The NYSE Composite closed up 0.3%. The Nasdaq closed up 0.4%. The Nasdaq 100 closed up 0.4%. The Russell 2000 closed up 0.2%. The DJ Transportation Avg. closed up 1.0%. The DJ Utilities Avg closed up 0.9%.
Gold closed down $2 an ounce at $1,573.
Oil closed down $.48 a barrel at $90.20.
The U.S. dollar etf UUP closed down 0.1%.
The U.S. Treasury bond etf TLT closed down 0.5%.Yesterday in European Markets.
European markets were mostly down yesterday. The overall Europe Dow closed down 0.1%. Among individual countries, the London FTSE closed down 0.5%. The German DAX closed down 0.2%. France’s CAC closed up 0.3%. Ireland closed up 1.3%. Italy closed down 0.9%. Spain closed up 0.7%. Russia closed down 1.2%.Asian Markets closed up last night.
The Asia Dow closed p 0.5%.
Among individual markets:
Australia closed up 1.2%. China closed up 2.3%. Hong Kong closed up 0.1%. India closed up 1.4%. Indonesia closed down 0.2%. Japan closed up 0.3%. Malaysia closed up 0.4%. Korea closed up 0.2%. Singapore closed up 0.3%. Taiwan closed up 0.8%. Thailand closed up 0.6%.
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Markets This Morning:
European markets are surging higher this morning. The Europe Dow is up 1.7%. Among individual countries the London FTSE is up 0.8%. The German DAX is up 1.6%. France’s CAC is up 1.3%. Norway is up 1.0%. Portugal is up 1.1%. Spain is up 1.1%. Switzerland is up 1.2%. Italy is up 1.7%. Russia is up 0.7%.
Oil is up $.23 a barrel at $90.35.
Gold is up $10 an ounce at $1,583.This Morning in the U.S. Market:
This week has an average schedule of potential market-moving economic reports including The ADP Monthly Jobs Report, Factory Orders, the Fed’s Beige Book, and ending with The Big One, the Labor Department’s Employment Report for February. To see the full list click here, and look at the left side of the page it takes you to.
There were no reports yesterday.
This morning’s only report is the ISM non-mfg Index, which will be released at 10 a.m.
Our pre-open indicators have been slowly improving as markets in Europe surge higher.
Our Pre-Open Indicators:
Our pre-open indicators are pointing to the Dow being up 65 points or so in the early going this morning.
To read my weekend newspaper column click here: Politicians Still Don’t Get It!
Subscribers to Street Smart Report: The new issue of the newsletter will be available tomorrow in your secure area of the Street Smart Report website.
I’ll be back with the next regular blog post on Thursday morning at 9:25 a.m.
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