Keystone was one of the very few forecasters that called for lower yields during 2011 which obviously proved correct. The multi-year downward-sloping channels are clearly visible with yield having a continual lower bias. The majority of traders were positive that the Fed's QE2 quantitative easing would lead to an explsion in yields during 2011; they were all wrong. The big yields will be coming at some point in the future as hyperinflation kicks in but in 2012 most traders will probably be frustrated again. Not by yields dropping all that much more signficantly, but rather that yields bump along with a sideways vibe for the next year or more.
Deflationary conditions remain likely for the U.S. economy and Keystone's Inflation-Deflation Indicator remains only a smidge away from the economy falling into Disinflation. Note the red circles above which all show higher values in the near term as compared to three years ago, when yields were higher, hence, positive divergence, and this placed the solid base. The positive divergence bounce is shown by the red arrow.
Since summer 2011, yields are moving in the range between 1.80% and 2.25%. Look for sideways yields for the foreseeable future. As mentioned above, the chart is forecasting a move thru the 1.80% to 2.10% as we prepare for the Easter Bunny and springtime weather. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view on this site. Consult your finanical advisor befoe making any investment decision.
KS, what does this all mean for the overall market? Are we going to see sideways action with an upward bias? Thanks again for all your great insights.
ReplyDeleteSteve
Hello Steve, in its most basic form, you want to watch the 10-year since you can gauge the direction of money in and out of the stock market. The 10-year also figures into bank and mortgage rates. The 10-year also allows a handy comparison to other yields around the globe to see where money is flowing.
ReplyDeleteLike the European bond yields that are posted most mornings here, the countries exhibiting higher yields are signaling potential trouble ahead since the rates must be raised to attract money.
Remember, note and bond prices move opposite of the yields. This is critically important when you start to look at TNX, TYX and ETF vehicles such as TLT or TBT. When lots of traders want to seek safety since they fear the markets are falling, they run to Trasuries. Hence, price goes up since more traders want them, demand is up, so since the price is moving up, the yield is moving down.
To answer your question, watch the current asset relationship; euro up=dollar down=commdoties up=stocks up=Treasury price down yields up. And visa versay, euro down=dollar up=commodities down=stocks down=treasury price up yields down.
This enable you to monitor and learn to develop a feel for the way the markets are moving any given day. If you see the 10-year yield falling, you know that the price is moving up, therefore traders are seeking safety and money is flowing out of stocks. If the yields are rising, then the 10-year price is falling, which means traders are leaving the Treasury market and seeking stocks and higher risk investments.
Now even though the 10-year is anticipated to move relatively flat, do not worry so much about the magnitude, watch the incremental change in direction of the 10-year.
Thus, for a quiz, if I told you the 10-year is going thru the roof today, what would you respond back?
The answer would be that you suspect that the stock market is going up strongly. Treasury price is dropping to attract buyers into bonds and notes since traders are taking money out and putting it in the stock market.