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Treasuries Showing Signs Of Exhaustion

11/28/11 09:40:09 AM
by Mike Carr, CMT

With 10-year yields under 1.9%, Treasuries seem to offer little if any upside.

Security:   N/A
Position:   Sell

Ten-year Treasuries are most likely benefiting from a flight to safety trade. Investors are worried about sovereign debt from several European countries, and the size of the debt markets in less-developed markets makes them difficult to trade. China's total sovereign debt is less than 10% as big as the US supply. Investors looking for safe bonds seem to have been turning to US Treasuries.

The weekly chart (Figure 1) shows that prices have been forming a topping pattern since August. This coincides with the Federal Reserve's implementation of "Operation Twist," an effort intended to bring down long-term interest rates. The historical precedent for Operation Twist, according to a Federal Reserve Bank of San Francisco "Economic Letter" (, was successful and helped lower interest rates by about 0.15%. Based on that, the Fed may not be able to get rates much below their current levels, but they also may be able to keep rates low for an extended period.

FIGURE 1: 10-YEAR TREASURIES, WEEKLY. Treasury notes have been in a narrow range for the past three months.
Graphic provided by: Trade Navigator.
Based on both Bollinger %B and the moving average convergence/divergence (MACD), the prices of Treasury notes are showing a negative divergence. These divergences are even more prominent on a daily chart (Figure 2).

FIGURE 2: 10-YEAR TREASURIES, DAILY. The topping pattern is visible on the daily chart, which also highlights the relatively narrow price range.
Graphic provided by: Trade Navigator.
Treasuries could stay at high price levels based on the flight to safety trade. Traders will remain concerned about Europe for some time and there are few options to Treasuries that are available. However, the demand will be offset by an increasing supply. Even optimistic forecasts project a budget deficit of $1 trillion in the current fiscal year. That will lead to the issuance of more government debt securities and the supply increase could help offset demand from investors.

Traders looking for gains should avoid Treasuries. They most likely have limited if any up side, and the risk is high that this could be a dead money trade. Other tradables have increased volatility in the current market environment and offer greater potential.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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