Thinking About Bonds

The meme of the day is that the bull market in U.S. government bonds is over. Yields are rising, which means prices will fall.

When the tectonic forces of the markets begin to move, don't run to shelter, run to the charts.

The price of 10-year U.S. Treasury notes (as tracked by their futures) began a long term rise in July 2007 from 104'190 as yields dropped sharply as a result of the Federal Reserves efforts to restart the economy.

By the price peak of 132'110 on Jan. 31 of this year, yields had fallen to levels where dividend paying stocks were considered to be a much better deal.

The most recent leg up began in July 2011 at 122'000.

Then things changed. The perception grew that a recovery of sorts was taking hold, that the Federal Open Market Committee had lost interest in further easing, that yields were about to begin climbing again.

From August 2011 the bond price began a sideways move that may be the top, as market commentary suggests, or that may be a correction on the way to further price highs and further easing.

From a chart standpoint, bonds have yet to set a lower high and lower low. Bonds remain in an uptrend from a long-term perspective. (And the long term is the best to look at bonds, which tend to have cycles running three decades or so. They aren't the sort of instrument that people like me use for short-term trading.

Even today's move didn't break the near-term trend. The 10-year T-notes were trading at 129'305 when the FOMC released minutes confirming that its members were little interested in further easing. In the ensuing 150 minutes, the price dropped to 128'245, about double the typical daily move.

Since the price peak, March 20 saw a low of 127'230. There was a bounce from that level to a lower high of 130'020. I would argue that it would take a break below 130'020 to count as a lower low and the beginning of a near-term downtrend.

Longer view, the march up to the peak had a correction to a low of 117'180 the first week in March 2011, and that price must pierce that level to count as a lower lower, which must be followed by a reversal from a lower high to count as a downtrend.

Do I deny that a bear market in bond prices is in our future? Not at all. I've stayed away from government bonds for the past few years because I thought that yields had no place to go but up, and price, down.

Is this the week the bond bear market begins? There's no way to know. A somewhat ambiguous Fed minutes release is a shaky hook upon which to hang that particular coat.

Today's price decline in the 10-year T-notes brings them down to where they were trading a week ago -- certainly not the sign of a precipitous abandonment of long-term government bonds.

For my own trading, I'm quite comfortable trading equities, but in ways that give them yield as though they were bonds. My preferred trading vehicle is covered calls and diagonal spreads, supplemented by directional plays.

I anticipate that strategy to carry me through the end of my trading days. If the long-term bond cycles continue to hold sway, we can look for yields to peak around 2042.



Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.