What About U.S. Bond Market?
Interest-Rates / US Bonds Feb 15, 2013 - 09:40 AM GMT
All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident. - Arthur Schopenhauer (1788 - 1860)
Interest rates are an integral part of our life since most of us have mortgages, car loans, credit cards, and even student loans. Interest rates are the new plague and they are everywhere. The media continues to remind us that the US Federal Reserve, acting in our best interest, will remain accommodative for many months to come. That means keeping rates at or near zero and the presses rolling. This will supposedly grease the wheels of the economy and facilitate the recovery we’re hearing so much about. Inversely the media never mentions the fact that it’s the market that sets rates, and that very same market has been raising rates for months.
Higher rates are evident in this chart of the yield on the 10-year Treasury:
Rates bottomed in July 2012 and ran up to the 18.55 resistance, requiring five attempts before we finally saw a breakout that stuck. In the process the 50-dma has moved above the 200-dma and we can see three unfilled gaps left in the wake. Yesterday it made a new closing high for the move and entered the large unfilled gap left over from April 2012. All of this has developed even as the Fed buys US $85 billion in debt each and every month.
Bonds move inversely to rates and bonds experienced a significant period of distribution and then turned down:
You can see that a major break occurred in December 2012 and since then we have a series of lower highs and lower lows. What’s more the RSI stands at 41 and that tells me that bonds still have room to fall before they become oversold. Personally, I am looking for a test of the 135.00 area before we see any kind of decent rebound. Furthermore I am looking for a test of 108.00 before the end of the year.
Higher interest rates will reverberate through various markets and that includes the Dow:
Low rates have been the key to keeping the Dow moving higher after the 2007 crisis. What’s more it is no coincidence that both the bull market in bonds, as well as stocks, began in 1982! Higher bond prices mean lower interest rates, and stocks love lower rates.
Yesterday the Dow fell 36 points to close at 13,982 and 182 points short of a new all-time closing high. If the Dow does fail to make a new all-time closing high, and confirm the Transports in the process, it will be due to the fear of higher rates coming down the pike. Higher rates mean the cost of business is on the rise and businesses are struggling to keep prices lower as it is. It is worth remembering that the market is always looking forward so if it stalls here, it’s because it sees something coming that it doesn’t like. That something could very well be higher rates, so I’ll be watching the Dow closely here to see what develops.
Finally, there is one more indicator that we can use to tell if rates are in fact headed higher or not. The Dow Jones Utility Index is extremely interest rate sensitive and it has not been following the Dow higher. In fact in the following chart you can see that the Index has carved out a series of higher lows and higher highs:
Also, the 50-dma has now moved below the 200-dma and that is quite bearish. Finally, we can see a rebound that has come back up to a trend line connecting the last two highs. A move above 480 would indicate that the Index could move higher whereas if it turns down here it would be quite bearish. If it turns down I suspect the Dow will go with it.
Robert M. Williams
St. Andrews Investments, LLC
Nevada, USA
Copyright © 2013 Robert M. Williams - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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