Are Treasury Yields Headed Lower?

By: Guy Lerner | Mon, Nov 16, 2009
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I am beginning to see signs that there is a high likelihood of this occurring over the next couple of weeks. Figure 1 is a weekly chart of the Ultra Short Lehman 7-10 Year Treasury (symbol: PST); this is an ETF that corresponds to the inverse of the daily performance of the Barclays Capital 7-10 Year U.S. Treasury index. In other words, it moves in the direction of Treasury yields. With Friday's close, PST is now trading below 3 pivot low points, and as I have shown in the Dollar Index (and observed with other assets) this is a very ominous pattern. In the figure, I have labeled the 3 pivot low points. A weekly close back above pivot 1 at 52.89 would violate this pattern.

Figure 1. PST/ weekly

Figure 2 is a weekly chart of the yield on the 10 year Treasury (symbol:$TNX.X), and this is the same graph that I showed on October 9, 2009, when we last reviewed the technical picture. The key pivotal area appears to be around a yield of 3.437%. Yields are currently below this area after a brief foray above. However, yields do remain above the 40 week moving average and the down sloping black trend line (both positives). Failure to remain above the pivot low point at 3.437% is the first sign of weakness in Treasury yields.

Figure 2. $TNX.X/ weekly

I believe the implications of lower Treasury yields are noteworthy as it implies a deflationary environment and slowing economy. Lower Treasury yields typically signal the peak in equities especially during bear market rallies. See the article: "David Rosenberg: This Is Your Last Chance". Of course, a continued deflationary environment could be interpreted as giving policy makers (i.e., the Federal Reserve) carte blanche with regards to money creation. Economic weakness implies ongoing Fed stimulus and Dollar destruction; this would be an equity positive. Of course, these trends cannot go on forever without ill towards effect. We are seeing signs of exhaustion in equities and the Dollar is near support last seen in early, 2008.



Guy Lerner

Author: Guy Lerner

Guy M. Lerner

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