Our Macro View On Treasury Bonds
Long term Treasury yields have been in a 30 year downtrend. As you can see in the chart below we are testing this downtrend line right now.
30-Year Treasury Yield
Why are yields rising? There are a variety of reasons, each at least partially true. One of the primary reasons that investors have been dumping bonds as of late is due to the fact that the government has been printing money as fast as ever, and spending it even faster. This can, and likley will, lead to some strong inflation down the road. That being said we think that the inflation trade is a bit overdone for now as it appears as though we will be in a deflationary state for at least the rest of the year.
Another major reason that bonds have been selling off is due to the fact that the United States has far more unfunded libailitis then it can hope to pay off without some major dollar devaluation. While we have years to go before an eventual and inevitable credit downgrade, we think that it is a near certaintly that it will happen.
The last major reason for investors to be selling off Treasury bonds is due to the fact that they yields were simply too low. Who wants to lend money for 30 years at 2.6%? In anything less then an all out depression a yield of 2.6% is terrible. Consequently bond investors started to leave Treasuries, and have continued to leave as they go into investment grade corporate bonds, junk bonds, and municipal bonds. This selloff in bonds has of course caused yields to climb higher and higher, finally hitting one year highs.
Due to the violent selling in long term Treasuries we see some potential on the long side. Yes, long term we are bearish and feel that they have only begun a multi year fall from grace. But for now they are extremely oversold and we see a solid risk to reward opportunity.
The chart below shows the 30-Year yield, the distance from the 200-day moving average, and both the 1 and 2 standard deviations from the historic mean. Essentially this chart shows how oversold or overbought yields are in relation to its historic relationships with its 200-day moving average. As you can see in this chart we have gone from a drastically oversold condition into a drastically overbought condition. Remember that this chart shows the yield of the 30-Year bonds so it is charted inversely to the actual bonds.
TYX 30-Year Reversion to the Mean
As seen in the long term chart of the 30-Year yield we are right at a 30 year resistance line. While we will eventually break above that line, for now we are looking for a strong rebound. Looking at the chart below of the TLT 20+ Year Treasury ETF we have drawn two different lines. The first line is a short term downtrend line that is right at $96. The second line is just short of $100 and is a major area of resistance. Essentially we are looking for a pullback into one if not both of these areas. In our model portfolio we are already long and are looking to sell if we can hit either of our targets.
TLT 20+ Year Treasury ETF
Happy Trading,
The Macro Trader
Disclaimer-We currently have a position in TLT
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Title: Our Macro View On Treasury Bonds
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