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The 10 Year Treasury yield has been popping since the beginning of December (about a month). It's almost up to the yield in July 2009.$TNX

The 10 Year Treasury yield fluctuates seasonally. It's usually highest in midyear, due to increased demand for mortgages during the spring home buying season. It's usually lower during the winter.

I analyzed the 10 Year Treasury yield to determine whether that rule of thumb holds, and if so, by how much.

To do any analysis, I needed a nice, consistent data set. I didn't want perturbations by financial crises.

The following chart shows two different periods with a nice, even fluctuation around a linear trend during reasonably calm economic times and steady inflation. One is the period from 1987 to 2002, when the yield declined. The other is the period from 2003 to 2007, when the yield trend increased.

These were obviously different situations, so I analyzed them separately. I removed the data from Feb. 1993 to Jan. 1994, because the yields were unusually low (the first year of the Clinton presidency).

The 1987-2002 trend's R-squared was 0.86, quite strong. The 2003-2007 trend's R-squared was only 0.47, but still worth looking at.

I analyzed the monthly deviation from the trend line.

Result: As expected, May - July averaged yields above the trend. December averaged yields below the trend.

Average deviation from trend

1987 to 2002 2003 to 07
January -0.13 -0.06
February -0.15 -0.10
March 0.02 -0.12
April 0.02 0.04
May 0.14 0.02
June 0.02 0.00
July -0.03 0.08
August -0.04 0.03
September -0.08 -0.13
October -0.12 -0.09
November -0.15 -0.17
December -0.18 -0.22

The increase in the 10 Y Treasury yield in December 2009 is atypical and contrary to the normal trend.

I think this is happening because the Federal Reserve ended its Treasury purchase program (October 2009) and has announced that it will stop buying mortgage backed securities in March 2010 -- a market that correlates and competes with the 10 Y Treasury. Also, this may be a reaction to China's stated intent that they can't increase their buying proportionally to the government's issuance of Treasuries.

As a result, I sold my Ginnie Mae funds. I plan to hold my TIPS to maturity, because I think the market is drastically underestimating the risk of inflation in the medium to long term.

Wendy (cross-posted on the METAR Board)

P.S. e-mail me if you want to see the spreadsheets.
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