Global Interest Rate Outlook

It has been a while since the last time we posted our global GDP weighted yield curve.  While it has been months it might as well have been a day as nothing has really changed.  After being inverted for all of 2007 and most of 2008 the yield curve flipped and became extremely positive as central banks worldwide lowered short term rates.  You can see this very clearly in the chart below of the G-10 nations short and long term rates. In spite of Australia raising theirs, short term interest rates remain extremely low everywhere else.

G-10 Short and Long Term Interest Rates


Another way to look at interest rates and in fact the title of this post is by using the global GDP weighted yield curve.  In the chart below you can see the global yield curve.  While it has fluctuated it has essentially gone nowhere for the last eight months.

Global GDP Weighted Yield Curve


So whats The Macro Traders outlook?  We think that things will remain more or less the same for most if not all of 2010.  On the deflationary side banks have not started to lend, real estate is not going up anytime soon, debt deleveraging is in overdrive, unemployment is as bad as ever, etc.  On the inflation side commodities are up, stocks are up, and bonds are up.  At best we would call this a standstill.  So while we could envision long term rates going higher on credit risk, yes we think that sovereign debt is full of credit risk, we think that short term rates will remain low for most if not all of 2010.

Happy Trading,

Disclaimer-The Macro Trader is long TLT

Favorable Risk to Reward in Treasuries

While many investors are calling for a large drop in long term Treasuries we are currently seeing a good risk reward trade to the long side in the long bond. In the chart below you can see our reversion to the mean chart on the 30-year Treasury yield. When it is stretched to the downside things are bearish and when it is stretched to the upside it is bullish. Right now it is stretched almost 1.5 standard deviations away from its historical mean which usually leads to a move lower in yields and a move higher in bond prices. (Click on chart twice to enlarge)

30-Year Yield Reversion to the Mean Chart


As you can see in the chart below of the 30-Year Treasury yield we are at the top of a long term downtrend in yield. Each time since the 1987 that yields have hit this line they have gone lower. Eventually this will stop and yields will breakout to the upside but if history is any guide and the trend continues than at least for now yields are once again headed lower. (Click on chart twice to enlarge)

30-Year Treasury Yield


Finally lets look at the LT 20+ year Treasury bond ETF. As you can see below it has found support over the last seven months in the highlighted $86-89 range. On the upside we have resistance around $98. The risk to reward is quite favorable right now as we can risk $1-2 with an upside around $9. (Click on chart twice to enlarge)

TLT-20+ Year Treasury Bond ETF


So while this may be the time that Treasuries tank and yields go screaming higher we doubt it and are modestly positioned to the long side. Eventually we will be shorting Treasuries but not until yields break out and end the trend that has been in place for over 20 years.

Happy Trading,

Disclaimer-The Macro Trader is currently long TLT

Interest Rates and the MOVE Index

We keep hearing that long term Treasury Bonds are going to tank and that we need to get short before they fall off a cliff. While this may very well happen, we doubt that it occurs anytime soon. We are not alone in this view as Bill Gross and the gang at PIMCO seem to agree. While some argue with his view of a new slow growth period the market does not seem to have an issue with it. Not only has Helicopter Ben said that the Fed is not raising rates anytime soon, but market indicators are saying the same thing.

One Treasury indicator that we use is the MOVE index which is a “yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of volatilities on the CT2, CT5, CT10, and CT30.” As you can see in the chart below it has been falling since July as the market has come to the realization that we are in for a slow growth period and that the Fed is not going to raise rates any time soon.

MOVE Index


Happy Trading,

Disclaimer-The Macro Trader is currently long AGG

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Why We Bought Gold

In our December 7th, 2007 issue we went bullish gold. By way of the ETF GLD we got in at $79.60. Currently it is right around $87. So to help our subscribers and potential subscribers understand our trade process we felt it would be helpful to walk you through this trade.

We look for potential trades fundamentally and trade them technically. As we have mentioned before technical analysis helps us define our risk vs. reward and makes our trading more objective. We like to think we get the best of both worlds.

Fundamentally there are several things that are bullish for gold and precious metals in general.

-Negative real rates. When inflation adjusted rates are negative you want your money in real assets.

-Falling US Dollar. If the US Dollar is declining in value relative to almost anything you want your money in other currencies. While we don’t necessarily think we need to be back on the gold standard, we do see gold as an alternative currency.

-Rising Swiss Franc. Historically when the Swiss Franc is rising it means that investors are putting their money in a safe haven currency. The correlations between gold and the Swiss Franc have held over the long term due to many of the same reasons.

-Rising Inflation. Again if your money is devaluing you want to put it somewhere else.

These are but a few of the reasons that we have been bullish gold. After we have a fundamental reason to go long or go short as the case may be we then look for a catalyst. That catalyst can come in many ways. Sometimes it is an actual economic number, a chart pattern, or any number of things. In this case it was a textbook example of a triangle consolidation.


As we have posted before we are huge proponents of risk management. We have found that for us technical analysis is one of the big pieces of the puzzle. Using charts we are able to define entry and exit points in an objective way. Some may disagree with us but we have found charts to be invaluable. In the case of gold we had wanted to get long for a while but it was overextended. Well patience paid off because it pulled back and consolidated and formed a strong triangle. We placed it in our newsletter and that same week we got in at $79.60. As of tonights close it is at $86.50 and our current stop is at $84.38

Happy Trading,

The Macro Trader

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