TLT: volatility is coming for some days..

200 daily moving average is the key.

TLT is showing some keys

In the big picture, TLT looks like it is developing wave 4, until 96.72 (we know what this means for the S & P the US treasury bonds downtrending, at least in the short term). This is supported also by the reversal pattern (hammer followed by a red candlestick). The target is 96.72. In addition, the last news are showing a change in the mood of the market (jobs report, FED speech, etc.). We can add to this, the behavior of the VIX during the last week (weak and without a clear trend in the weekly chart). I am thinking on possible objectives for wave 5. Still I do not know the target of that wave. 

TLT daily chart:

China: covering shorts on US treasury bonds?

China: Rumors of the Central Bank Chief's Defection | STRATFOR 

I just read this news and is worth to notice that, even if this is not true, it is perfect to explain the last rally in US treasury bonds. Last months we were trying to find something that explains why the yields tanked again. I did not saw panic in the market (only in the fat finger day). In addition, I think this last movement on yields does not looks like a "flight to quality" and the yields were relatively low (compared to other investments) to justify a big buy on them. The last explanation to this big buy is china covering big shorts....I am still in research on this matter.

10 year US Treasury bond yield analysis

I was wondering on the possibility of the yield of the 10/year T-bonds (from now, the TNX) to continue up, if we consider that a sharp correction in the financial markets is very likely.

Then, I started looking at the correlation between the TNX and the S & P 500. Here are the results:


As we can see in the chart, there is no evidence of correlation between the indexes. Then, it is possible to expect new lows for the market, with a flat or rising TNX (like the January - March 2009 period). The red line represents the regression line, which estimates the relation between the two variables, the TNX and the S & P 500. The R square is 0.001, almost null. Number of observations: 2481. From January 1962 to July 2009.

What about the Fed Fund Rate?

Macroeconomic theory tells us that long term interest rates tend to move in the same direction with short term interest rates. Then, we would expect the yield on a long term asset like the 10 year T-bond to move up when short term rate like the federal funds rate moves up.
I read a paper entitled "How the Federal Reserve Fund rate affect the 10-year T-Bond yield" and conclude that the federal reserve funds directly influences the 10 year T-bond yield.

TNX vs. Fed Fund Rate:

In addition, from the fundamental side, I do not expect a new "flight to quality". The reasons:

1) The constant issue of new debt from the treasury. The government debt is loosing "quality".

2) The panic. We do not have a panic or high since October 2008, and it is not expected new volatility for the future as we can see in the dowtrending VIX.

3) The Federal Reserve does not have space to decrease the FED FUND rate given the current levels.

4) In the short term, I expect that the FED will continue with the minimum discount rate, because at the moment inflation is unlikely. But, in the near term, with the economy improving, the inflation threats will oblige the Fed to rise interest rates. This will push up the TNX, and, which is more dangerous, the conventional mortgage rate. See the chart:


Technical perspective:

TNX daily chart:


TNX monthly chart:

As I always say, this is my humble opinion. But this are the facts. It would be interesting to know your opinions.

Source of research:

http://www.federalreserve.gov/econresdata/releases/statisticsdata.htm

US Treasury Bonds: TBT & TNX

During the lasts day, is interesting to note how the Us Treasuries were going up, although the fear to the inflation that is around the markets.

If we look at the daily chart of the 10 years US treasury Bonds yield ($UST10Y), we can see that this uptrend still very powerful.

Note that it is still inside the uptrend channel.


10 years US treasury Bonds yield (Daily chart):



10 years US treasury Bonds yield(Weekly chart):




TBT

This is the short ETF of the 10 years US treasury bonds. We could expect a bounce on the 200 SMA (Green line).





TBT compared to TNX (The 10 US treasury bond Yield):

It is interesting to watch how the ratio is changing its trend. But, in the long term, this ratio should continue downward. In the short term, TBT should outperform TNX.


TNX LONG TERM logarithmic CHART:




Important NEWS:

Treasuries Gain as Asian Stocks Fall, Fed Plans to Buy Notes

http://www.bloomberg.com/apps/news?pid=20601009&sid=aRqviLbpagjE