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Bonds And Bills Differ

11/11/04 08:19:34 AM
by Arthur Hill

The 13-week Treasury-bill yield has taken note of recent rate increases, but the 10-year T-note yield is only just starting to conform.

Security:   $INX, $IRX
Position:   N/A

The Federal Reserve Board began to raise rates in June with four increases (June, August, September, and November). However, the 10-year T-note yield peaked in June and has declined steadily over the last six months. Conversely, the 13-week T-bill yield bottomed in May and has risen steadily over the last seven months.

The decline in T-notes and rise in T-bills has served to tighten the yield curve. In May, notes were yielding 4.85% (48.51) and bills were yielding 0.98% (9.80). The effective spread was 3.87%. This spread represents the yield curve. A large and positive spread reflects loose monetary policy, while a small or negative spread reflects tight monetary policy. The spread has narrowed over the last seven months and ended around 2.14% in October. As long as the red trendline holds, the trend for the spread is down and the Fed's bias is for tightening.

Figure 1: Yields, T-notes vs T-bills
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
Turning to the chart for the 10-year T-note yield, we can see a falling price channel over the last several months. (Note: Rates and bonds move inverse. Bonds rise when rates fall and bonds decline when rates rise.) TNX broke above the upper trendline, but has yet to exceed the prior high (48.51) to complete a reversal. A move above this level would be bullish for rates (bearish for bonds) and signal a continuation of the March to May advance.

Arthur Hill

Arthur Hill is currently editor of, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for and the main contributor to the ChartSchool.

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