Saturday, August 23, 2008


a week ago I wrote about a scenario that could be bullish bond prices. in fact I described how rising bond prices could snowball into a 'bubble'. now I'm sure some are thinking, 'aren't bonds in a bubble already? I thought interest rates were Too Low, and the foreigners are gonna dump all their Treasurys, inflation, &c, &c?' I've addressed some of these issues before and surely will again in the future, but for now just ask yourself on what basis are rates Too Low? what are the barbarians going to trade their notes for? where is the causal link between bond yields and inflation rates? the 10 year Treasury yield, for example, has been lower, on average, this year than pretty much any time in recorded history (at least recorded by the St Louis Fed). maybe the first half of 2003 comes close, but remember that was at the height of a deflation scare. yet, much of this year inflation concerns have been predominant. food for thought. if you can afford it.

but the purpose of this post is to address the recent price behavior of the Treasurys. in the first half of this last week, prices continued on the bullish trajectory established over the last month, but then ended the week with a sharp pull-back, erasing about all the gains of the previous several days. the daily chart of the 5 year is worth looking at:

one way to interpret the recent movement would be that it's just a little shake-out before the real fulfillment of the potential inverse head and shoulders pattern. that's the way I'm viewing it for now. however, looking at this chart, I can't help but see the possibility that the recent high was but the C wave of an ABC countertrend rally. that would mean a multi-wave decline from here, with the price likely hitting a new low for the year. say around the 108 range.

I'm bullish, but I don't want to be blind to alternative possibilities either.