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Tiny Bubbles Are Great

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Like John, I woke up this morning to the following headline above the fold of the Financial Times: "Investors fear end of bond bubble is in sight." He made some great observations in his piece and suggested we watch for signs of trouble in bonds so I wanted to chime in with some near-term technical comments on the U.S. bond market.

Yesterday Jason looked at Rydex bond fund buyer sentiment, which was suggesting too much near-term bearishness on bonds. In addition to sentiment measures I also like to periodically review the charts of bond futures, the 10-Year Yield Index (TNX), and the 30-Year Yield Index (TYX), among others. We also have two indicators with respect to bonds that I'll discuss more after the Holiday. (They remain bullish...for now.) Today, however, I wanted to look at the charts of the TNX and TYX.



Despite last week's rate cut by the Federal Reserve, both the chart of the TNX and the chart of the TYX last week gave buy signals, their first buy signals since March in fact. Remember yields move inversely to prices so these charts become more bullish looking as bond prices begin to break down and take on a more bearish tone.

Both charts are approaching important, longer-term resistance levels. For the TNX I would be surprised, based on the chart, to see a sustained move much beyond 3.8. However, if this were to occur then we might see a further run toward the December peak of 4.35, which incidentally is the point & figure vertical price measurement based on the recent buy signal. Likewise, the TYX should begin to experience trouble in the 4.7 area.

Despite the recent counter-trend moves for both bond futures (down) and the two charts above (up), the longer-term trends remain very much intact. Is this the first step toward a major trend reversal for the bond marker? What I will be watching for are signs of trend line violations and higher bottoms to form. Nothing moves up, or down, in a straight line and either the technical signs of a trend reversal will begin to take shape over the next few weeks, or we'll see the yield charts falter and fail as they near their long-term, downward moving trend lines.

Jim Grant last month in Grant's Interest Rate Observer described long bond positions as "reward-free risk", and while I happen to agree with that assessment the charts suggest the short side carries its own special risk here, namely fighting the longer-term trend higher for bond prices.

Fortunately, not being long bonds doesn't mean we have to be short bonds. We also have the choice to be patient and do nothing. And sometimes, Dragline, nothing is a pretty cool hand.

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No positions in stocks mentioned.

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