Long End Treasury Yields Falling

With the 2 year Note Yield at record lows and the 5 year near record lows, I wanted to examine how much further they could fall and how much further the 30 year bond could fall to catchup to the levels seen when the 30 year made record lows December 18, 2008.

The Chart below shows yields on the 2,5,10, and 30 year going back to January 2008.

The Chart below shows the yield spread between the 30 vs 2, 30 vs 5. I also divided the 30 yr by the 2 year and the 30 year by 5 year to see the spread at a more magnified view.

The 2 year has breached 2008 lows and is making new record lows, while the 5 year is 20 basis points from the low of 1.266 set December 18,2008. The 30 year has a long way to go if it is to catchup to the yields it saw during December 2008 lows. Given the Short end of the curve has already hit or is near record lows, how much further does the 30 year have to drop to catchup?
The 30 year made a record low of 2.53% on December 18, 2008, which means as of Fridays close the 30 year trading at 3.87% would have to drop 1.34% or 134 basis points to retest those record lows.

With ZB currently trading around 132, we could expect ZB to rise all the way to 142 if yields are to retest December 2008 lows.
Here is a chart of ZB Trading Today August 15, 2010.

Here is a chart of ZB trading under the March 2008 contract during the period of December 2008.

Here is a good article from Bond Squawk on Negative Tip spreads.

If negative TIP spreads don't currently forecast rising inflation, but just a reduction in forecast GDP and economic growth, then would gold be a good investment? Most people believe gold is a good inflation hedge; however, Mish Economic Analysis found Gold to be a better investment during periods of Deflation as opposed to periods of Inflation.

So what should we do? Bet on Deflation and a possible double dip recession? Buy the long end of bonds, go long gold, and stay out of stocks? We shall see in time what happens.

Long End Treasury Yields Falling

With the 2 year Note Yield at record lows and the 5 year near record lows, I wanted to examine how much further they could fall and how much further the 30 year bond could fall to catchup to the levels seen when the 30 year made record lows December 18, 2008.

The Chart below shows yields on the 2,5,10, and 30 year going back to January 2008.

The Chart below shows the yield spread between the 30 vs 2, 30 vs 5. I also divided the 30 yr by the 2 year and the 30 year by 5 year to see the spread at a more magnified view.

The 2 year has breached 2008 lows and is making new record lows, while the 5 year is 20 basis points from the low of 1.266 set December 18,2008. The 30 year has a long way to go if it is to catchup to the yields it saw during December 2008 lows. Given the Short end of the curve has already hit or is near record lows, how much further does the 30 year have to drop to catchup?
The 30 year made a record low of 2.53% on December 18, 2008, which means as of Fridays close the 30 year trading at 3.87% would have to drop 1.34% or 134 basis points to retest those record lows.

With ZB currently trading around 132, we could expect ZB to rise all the way to 142 if yields are to retest December 2008 lows.
Here is a chart of ZB Trading Today August 15, 2010.

Here is a chart of ZB trading under the March 2008 contract during the period of December 2008.

Here is a good article from Bond Squawk on Negative Tip spreads.

If negative TIP spreads don't currently forecast rising inflation, but just a reduction in forecast GDP and economic growth, then would gold be a good investment? Most people believe gold is a good inflation hedge; however, Mish Economic Analysis found Gold to be a better investment during periods of Deflation as opposed to periods of Inflation.

So what should we do? Bet on Deflation and a possible double dip recession? Buy the long end of bonds, go long gold, and stay out of stocks? We shall see in time what happens.

30 yr Bond Reversal?

The 30yr bond futures contract looks setup for a head and shoulders pattern.
Also the BOE left rates unchanged and a new administration is entering the whitehouse.
With interest rates at almost zero percent in the US, where else can bond yields go but up.

30 yr Bond Reversal?

The 30yr bond futures contract looks setup for a head and shoulders pattern.
Also the BOE left rates unchanged and a new administration is entering the whitehouse.
With interest rates at almost zero percent in the US, where else can bond yields go but up.

FOMC leaves interest rate unchanged

A crazy day to say the least. I'm kicking myself for covering my ZB short and selling my YM long so soon. There will always be another day. I really feel like shorting ZB on every bounce up, as I believe US Treasury yields will go up from here.

FOMC interest rate decision today

Today's the big day. Good luck people. I have no clue where interest rates will go, but I am expecting rates to stay unchanged.

Are LEH and WM headed for Zero?

Mortgage rates have spiked lower dramatically.
How low will mortgage rates go? When the 2yr treasury note is yielding 1%, maybe we'll be closer to the bottom.
ZB is grinding higher, yields continue lower, and more financial stocks like LEH and WM go lower. You have to question the drop in yields in conjunction with the weakness in these stocks. Is the price action suggesting one or both of these stocks will go under. And if these companies go under what effect will this have on US treasuries. Definetily a spike lower will occur just like we saw with the Bear sterns bailout. The question is, if and when will it happen.
What are blogs saying about FRE, FNM, LEH, and WM?

Where do US Treasuries go Now?

We have the largest corporate failure of all time occurring over the weekend and I don't see that big of a reaction from people as I would expect.

If the current trends keep going, stocks will go lower, mortgage rates will go lower, bond yields will go lower, housing prices will go lower, the Euro will go lower, Crude oil will go lower, and investor confidence will go lower.

I thought that interest rates were likely to be raised next year and that treasury yields were likely to bounce at these levels and never return, but, with the government taking over FNM and FRE, I'm not so sure.

The FED could lower interest rates more and mortgage rates could go lower. With the FED taking over FNM and FRE, I'm wondering how big of an affect this will have on US treasuries. Will there be a lack of buyers? What happens if a large bank like Washington Mutual collapses and the FDIC needs to go to the US treasuries for bailout money? We already saw the FDIC increasing reserves a couple weeks ago. The FDIC failed bank list is growing, with expectations of over 100 banks to fail before it is all said and done. I'm not sure where treasuries are headed right now. Even though we are at historically low levels, we could still go lower. The best thing I can do is to stay on the side of the trend and the trend is down.

Time to buy?

Well the dow goes up one week, and back the next, its been like this for months, however I see some big swing trading setups on the horizon.
I think the long term outlook on bonds yields going up is good. I also think the Dow could bounce 1000pts back to 12,500. The commodity energy trade is probably over now that we are headed into winter season (that's what common sense would think). I'm not sure if the FED is going to raise interest rates anytime soon now. With the Economy still weak, it is very likely they will keep rates unchanged for awhile until demand picks up in the housing market. We are entering the weakest period of the year for housing sales, so I'm sure there will be a lot of ugly headlines to come this fall regarding housing. I'm a strong believer Mortgage rates will be much higher this time next year as with interest rates, so my long term outlook is higher yields on bonds.

In order to magnify whats been going on in the markets, I've compared a chart of the 5yr bond (inverted and mirrored) vs. FXI (China stock ETF)


30yr

5yr
10yr
Dow

FOMC week

We have the next FOMC meeting on Tuesday at 11:15am EST.
Most expect no change in interest rates.
I expect one swift move in the markets on Monday, which will be the setup day for Tuesday; which normally is a day filled with Chop and short bursts of volatility as the market reacts to the latest from the FOMC interest rate decision.


30yr bond and Euro


4 Central Banks Set to Announce This Week (from ForexFactory)
There are four central banks (AUD, USD, GBP & EUR) due to report this week on interest rate targets. Most analysts seem to be looking for no actual changes this time around but that does not mean that the market won't respond to the statements accompanying the releases. There is a great deal of sensitivity to these releases considering the recent surprise from the RBNZ and market volatility over the last week. Considering these reports, I see no reason why this volatility would decline this week.

Besides the releases from the central banks, the market is preparing for a continuation of last week's trend in favor of the USD. The affect here may be driven by a response to the J-curve. The J-curve describes the relationship a devalued currency has with its export growth. As the USD falls in value, cheaper exports from the US should rise in demand. This increase in export demand was somewhat in evidence with the preliminary GDP report from last week. Ultimately the curve predicts that demand for the exporting currency should eventually rise, which may be what is happening currently. This is an important week for the short term future of a stronger USD as it sits against resistance after failing to break highs from June and May on Friday. A break here could mean the longer term effects of the J-curve are starting to take effect and a strong USD trend is in play.

30yr bond and Mortgage Rate outlook

30 yr Bond Yields- I'm slightly bullish on long bond yields short term, and very bullish long term. After the housing mess, the FED's priority should be to fight inflation and to raise interest rates. Mortgage rates are already on the rise.
Long Term view of 30yr Bonds
Mortgage rates- I doubt we will see 30yr fixed mortgage rates go below 6% again.
FRE weekly Mortgage rates
From BankRate.com-
Mortgage X also has some great historical charts for interest rates

IWM (Russell 2000 ETF) - The Russell has been relatively strong compared to DIA and SPY the last couple of weeks. I'm preferring intraday long trades on ER2 (IWM) over YM (DIA).
SPY- Volume is light on this pullback, which could make a bullish case for another bounce up in the market. One of my intraday setups is to look for pullbacks on light volume and to enter long, but this occurs during strong uptrends. Whether or not this is a buy setup will surely depend on the fate of the financial sector (XLF) and whether or not the oil sector holds up (XLE).
FXI- I'm pleased to see that they did a 3:1 stock split July 24. This will make it a better trading product in my opinion.

March 18 FOMC announcement

Here's the video- The top right chart is the Euro, bottom left is ZN (10yr bond future), and the right chart is ES (SP 500 future).



Sorry for the High Probability Trading watermark, I should have made it more transparent but I'm too busy to go back and fix it.Unfortunately my computer got the "Blue screen of death" while recording, and this is all the video I was able to recover. The one thing I can take away from today is that Vista sucks.

Open interest and intermarket relationships

I'm doing my homework on open interet for options and futures between the stock indices, bond market, and forex market. I found a CBOT headline from last May about how the 2year note hit an all time record in open interest on May 10th, the same date the Dow was at its high for the year. The next day, May 11th, the dow began its correction for the year.






Also noted recently by many blogs such as Tradersfeed and the Vix blog was the extremely high put/call ratio seen in the equities market at the beginning of this last week. I'm sure all the shorts know what happened this week and are starting to look into how open interest and put/call ratios may be a good indicator of where future price may go.

When the fed decided not to cut rates, I should have shorted the spike up in bonds, and played the reversion to mean, because if interest rates are unchanged, then there really is no reason for bonds to be that high just based on a comment of a possible tightening of rates in the future, and the same goes for the pop up seen in JPY. This is another reason why education in bonds, forex, and economics will help me in my trading in understanding the fundamental reasons behind the moves I see in my charts, instead of going on the false assumption that a price movement is because of a technical indicator or trend line.