Tuesday, February 15, 2011

Treasury Yields

Treasury yields continue to move up across the yield curve.  The shorter end of the curve is seeing an even larger move of late causing a bear flattening where rates are moving up while the curve is flattening.  The bond market is clearly signaling a number of concerns from inflation fears to the Fed's monetary policy to the US Fiscal irresponsibility.

Based on Fed policy and a sluggish at best macro story, many in the interest rate derivative market will be caught on the wrong side of the trade and the implications could be pretty significant.  Below are a few charts of the two year, five year and ten year.

If this trend continues it will play an even larger role in the Fed decision making regarding future QE.

Two Year Treasury

This morning it already took out prior lows and has failed not only at the 200MA but a three year trend line.  From a technical standpoint it appears more weakness (higher yields) are to come.

Five Year Treasury

QE2 was focused on this maturity for a number of reasons and it is showing renewed weakness.  What's most scary about this chart is the reality that the US debt is rolled approximately every four years and this part of the curve causes the most interest rate risk to the US.  Rolling the 14 trillion in debt is no similar than a consumer transferring credit card balances month after month to new cards.

Ten Year Treasury

Last week it looked like a successful test of the three year trend line would cause a bounce but that appears to not be the case now.  Ten year treasury yields have a direct correlation to thirty year fixed mortgages and housing prices.


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