Treasure Your Treasuries

By: Erik Swarts | Sun, Dec 11, 2011
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Analog studies are typically at best a broad delineation of future prices in a comparative market environment. They can at times give a very acute replication or fractal study of price structures (see Here or Here), but their utility to traders usually involves a great deal of interpretation and allowance of the current markets respective nuances. In many ways this is similar to conventional technical or even fundamental analysis, whereas two analysts will find differing conclusions based on their own methodologies of the data.

The ongoing credit crisis presents a unique environment for this kind of approach, because by definition of transmission - its effects to the markets are replicated through the system as the crisis magnifies and reaches new corners of the credit markets. I have written recently of these comparisons (see Here), broadly describing the first phase of the crisis as an impact to private credit (2007-2009) - while we are now experiencing the larger sovereign side of the ledger.

The following chart of the 10 Year U.S. Treasury:SPX ratio is a good expression of this dynamic - as Treasuries continue to defy gravity in the seemingly endless flight to quality. What is alarming (although it makes logical sense given the comparisons of capital in the sovereign debt markets) is the proportions of the structures have been larger this time around - when contrasted with the opening salvos of the financial crisis in 2007.


Not surprisingly, both 2007 and 2011 have experienced very similar volatility expressions, as traders react to the second phase of the crisis - much as they did in 2007.


And while it is difficult for many investors and traders to consider the prospect of further gains in the U.S. Treasury market, the long-term historical analogs would indicate that Treasury yields will likely fall further - eventually taking out the lows from the last cycles trough in the 1940's. What is interesting when placed in the context of history, is the rate environment of "the depression within a depression" in the late 1930's as rates fell further when the equity market violently reversed in 1937 into 1938.

Bill Gross seems to have come to terms with mother nature in once again returning to the Treasury trough (i.e feeding), after giving Bernanke the benefit of doubt in adversely affecting the long term forces of the credit markets. It seems history will once again repeat itself and give the Great Recession another chapter as well.

Fool me once, shame on you. Fool me twice - well...

p.s. - I wasn't fooled the first time.

200-Years of US Treasury Yield



Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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