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|Subject: Betting on the Direction of Interest-rates||Date: 1/4/2013 8:50 PM|
|Author: globalist2013||Number: 34598 of 35123|
Well. The FOMC meeting minutes were the watershed event that brought a HUGE dollar rally yesterday afternoon and overnight. The euro lost 1-cent, the yen is at a 2-year low VS the dollar, Gold has lost $35, and Treasuries are getting sold like funnel cakes at a state fair! What, in the world is going on here? Ahhh, grasshopper, the Fed threw a cat among the pigeons yesterday by saying in their minutes that they thought they would end their latest round of Quantitative Easing (QE) in 2013. For those of you keeping score at home, that’s $85 Billion in monthly bond purchases. So, from that you can see why Treasuries are getting dumped,, but the currencies and Gold? And did the Fed Heads say when they would end their latest round of QE in 2013? NO! So, it could end up being on the last day of 2013, when they also announce a new round of QE! Did the markets EVER take a moment to think of that scenario? NOOOOOOO! They just went “all in” and began selling Treasuries.
The 10-year yield, which yesterday morning was 1.83%, has risen to 1.96% this morning. (remember, as bond yields rise, the price of the bond drops) So, is this the watershed event that could swing a multi-year rally for the dollar? What I’m talking about here is will the rising bond yields remove the need to hold risk assets? That’s what it appears to be saying today. But let me remind you that we have seen these moves higher in bond yields a few times in the past couple of years, and they didn’t end up being too much of anything. Remember, the Fed IS STILL BUYING $85 Billion per month! I also don’t think the dollar has the ability any longer to go on a multi-year strong trend. But then that’s just me, as I see the debt being a major problem for the dollar to deal with. (from The Daily Pfennig, a free daily currency newsletter written by Chuck Butler)
Anytime any writer makes any claim whose import is sufficient to require action, the claim needs to be verified. One way to see if the 10-year bond is being sold is to pull a chart. So here’s a 5-day chart of ^TNX. http://finance.yahoo.com/echarts?s=^TNX+Interactive#symbol=^... Yep, it’s being sold, and aggressively so, with yields moving up an average of 4bps/day, which is HUGE. (Do the math. That’s the equivalent of 10% per year. That’s a HUGE move in the interest-rate world.) OK, the next step in dealing with any news item (and any commentary on any news item) is to discover whether the news is ‘new’. When, really, did Treasury prices start to fall (and interest-rates start to move up)? Well, pull another chart, this time one with a longer look-back, say, a 1-year chart of ^TXN. http://finance.yahoo.com/echarts?s=^TNX+Interactive#symbol=^...
Now we see why Chuck is saying what he’s saying, namely, “…we have seen these moves higher in bond yields a few times in the past couple of years”.
“Yeah, we have”, a good chartist would say, “and the price action since last August has been confined to a well-defined channel. But the Dec 28th reversal occurred in the mid-point of the channel, not the typical lower boundary, and today’s action put the yield above the upper boundary of the channel, possibly suggesting a breakout. In other words, the mood, tempo, action might be changing.”
If prices are falling, and one doesn’t own the asset, then the proper move is to go short. If one does own the asset, and prices are falling, then the proper move is to get out. Who would own interest-rates? Anyone who owns a bond fund that is making a bet on interest-rates, which –-as a rough proxy-- is any bond fund whose average credit-quality is invest-grade. So let’s do the next step in our analysis and game interest-rates. The obvious way to do that would be to pull data on the futures contract for the 10-year (ZN, if I’m remembering the symbol right). But most investors don’t mess with futures and/or have access to the data. An ETF based on the 10-year would be a good substitute, but I’m too lazy to look for one. But I do remember there’s an ETF based on the 20year, which is close enough for our purposes. If prices are falling on the 10-year, then they're falling even more on the 20-year and 30-year, meaning, the price action might be even more obvious. So here’s a bare chart of TLT. http://stockcharts.com/h-sc/ui?s=TLT&p=D&b=5&g=0... (If you’re unfamiliar with the Renko format, look it up, and then put it in your toolbox.)
Again, a bit of a refresher. Rising bond yields are created by falling bonds prices. Falling prices means a loss of capital, which is Not A Good Thing. But when should the owner of a bond fund have exited his position? Obviously, at the top of the market. That’s something that can’t be known in advance. But slapping some indicators on the chart does offer guidelines as to whether prices are rolling over. So, let’s do that. http://stockcharts.com/h-sc/ui?s=TLT&p=D&b=5&g=0... (Again, if you’re not familiar with the use and interpretation of TSI, KST, or MACD, then look them up and add them to your tool kit.)
Obviously, the three are redundant, as would be other momentum indicators that could be applied. But their message is clear. At least as long ago as last July, the owner of the bond fund should have been looking for the exit. Owners of individual bonds, OTOH, can sit tight. Prices might move against their position, forcing their broker to mark them down in value, but no permanent capital impairment will be suffered if the position is held to maturity. So that’s the game. Those who thought they were investing in a bond fund were actually trading the fund, and now the trade has moved against them. What they do about that will be for them to decide. But my bet is this. If interest-rates have really begun to move up, bond fund owners will go through the four grieving stages of Denial, Anger, Depression, and then, finally, Acceptance as they sell at the bottom once again. They could exit sooner. But they won’t. Fear and Greed will keep them in their trade.
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