Who Ordered Higher Rates?

By: J.D. Rosendahl | Wed, Feb 10, 2010
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On February 10th, 2010, www.bloomberg.com reports Bernanke says, "Discount rate may rise before long as part of normalization of Fed. lending, a move that won't signal any change in the monetary policy". Enclosed is a link to this report for further review: (http://www.bloomberg.com/apps/news?pid=20601087&sid=afLtoLSxKSKc&pos=1)

Sounds like political spin. What might be going on is the bond market is dictating the latest clap trap from Bernanke. Below is a daily chart of the 10 year Treasury yield. I've highlighted in green a potential Cup and Handle pattern, which is a very bullish pattern. The blue circle highlights the MACD is trying to turn up from just below the zero line, which is also bullish.

If the handle part of the pattern is finished we should expect a move up to 4% (The prior high), and then a break above that level soon after. If the right side of the cup is still forming, then we should expect a test of 4%, then a slide back to build the handle before we break above 4%.

In either case the price action still looks bullish, and if the 10 year yield breaks above 4% decisively, it confirms the pattern, which provides a minimum target of 4.9%. Below is the Point & Figure chart of the 10 year Treasury yield, which reflects a target yield of 5.4%.

If we get a move higher in yields, then we should expect the opposite move in bond values. Below is the daily chart of the 30 year Treasury bond.

Today the bond market rolled over in value right when the MACD is trying to do the same. The inverse relationship between yields and price are working in classic fashion.

In the treasury market, the pressure could be mounting for higher yields via the open market price action, and that could be a driving force behind today's comments, but don't expect a politician to say that and basically admit the open market is in control!

More important, is to keep an eye on the current technical set up in the above charts, if the patterns play themselves out then we get higher yields at some point in 2010. I don't think the world as we have it today, has higher yields priced into assets values, and I can't image how that's a good thing. Especially if it is the foreign holder of US debt selling and pulling that money back to their homeland.



Author: J.D. Rosendahl

J.D. Rosendahl

J.D. Rosendahl is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, we recommend that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

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