Interest rates are not a homogenous group. As we pointed out some two years or so ago, we believe the 32 or 33 year cycle is over except that it takes a little while for this to roll through the different maturities and credit qualities. This chart represents the Lehman ( yes it still exists) long bond ETF. This is a diagonal, unmistakenly. Today Carney failed to oblige the CB clique by not lowering rates. RBC went out on a limb to recommend gold, normally a kiss of death. Perhaps we are there!
Above is another very good example of the “diagonal contracting triangle” or wedge. The charts are the then and now depictions of the US 10 year note in yield terms. Then was 18 of Sept. 2012 and now is the 8th of Sept 2013, so they are basically a year apart. The wedge is very visible and the confidence of rates going up, despite the newly launched QE infinity and all the other hoepla from the Fed, was accordingly very high. Now a year later we are at 3% coming from 1.38% a double already and we have yet to reach the initial (minimum) target of 4% which represents the “base” of the wedge. See previous blogs under 10 year or interest rates.
The same wedge can be observed on the TLT, the long bond ETF. This chart is on a price basis, not yield. Consequently the wedge goes up rather than down. Interestingly one of the main reasons for the QE’s was to make mortgages cheap to help the housing market. How well that worked is painfully obvious from the chart. A 30 point drop on the price of the long bond is about equivalent to a 25% loss on your investment and we are not even close to the initial target of about 87.
There is a gap in this chart simple because at one point they stopped issuing 30 year bonds, they did not think they needed that maturity given the budget surpluses. Hard to believe now.
The TLT does pretty much the same but on price . not yield, so it is the inverse.
I did not anticipate the jump to 110 on the right shoulder (see previous comments). Ironically the drop from there coincides almost perfectly with the Feds announcement of QE2, not exactly what they had in mind! So here we are at about 90 (4.24% yield), about the average of the past eight years. But it certainly looks like the peak at around 2.30% is behind us. If the head and shoulder pattern is correct the TLT should drop to at least 70 over the next few years which would equate to roughly 7%. Perhaps a level where interest rates should be anyway.
In Canada the XBB ETF , based on a broader bond index (not shown), has a very distinct wedge like structure to it, suggesting it too is about to turn .
Perhaps it will take the same 34 years for yield to go down as it took for them to go up (1945 to 1980). In that case buying a zero-coupon 30-year bond would be very profitable. But this to me is a little like an “after us the deluge” kind of trade, one that does not logically combine with owning any stock.
Another conundrum? Greenspan did not understand why the long bond did not react as he had anticipated. Bernanke may be sharing that sentiment right now. Despite QE2 and 600 bln of treasury (or other stuff) purchases interest rates in the longer end have actually gone up and quite a bit. The price went from 110 to 94 or somewhere around, there which is pretty close to a full % in terms of yield! We are now back in the range of the past 8 years, say between 100 and 80 and could, if my head & shoulder depiction has any validity, go as low as 60. That would be a surprise!