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10-Year Rates Look Oversold

09/06/11 09:11:39 AM
by Mike Carr, CMT

Interest rates have fallen to historic lows and are now showing bubble-like extremes on the downside.

Security:   TY
Position:   Sell

Bubbles are usually associated with large upside moves. Large gains that develop at an unsustainable pace are the classic idea of a bubble. Interest rates are meeting those criteria with their downward move, falling almost as fast as they did in 2008 as the depth of the financial crisis was becoming clear.

Rates on the 10-year note are shown in Figure 1. They've fallen more than 30% in the past nine weeks. A faster move lower marked the height of the financial crisis in late 2008 as the rate fell 50% in a similar time. In this recent down move, the rate has fallen below its lower Bollinger Band as volatility increased.

FIGURE 1: 10-YEAR T-NOTES, WEEKLY. Ten-year rates have fallen more than 40% over the past 26 weeks and are at the lower Bollinger Band.
Graphic provided by: Trade Navigator.
Bonds show the opposite conditions as would be expected. In Figure 2, we can see that the price has moved up quickly. It's broken the upper Bollinger Band.

FIGURE 2: T-NOTES, WEEKLY. The futures contract on the 10-year note looks as overbought as interest rates look oversold.
Graphic provided by: Trade Navigator.
Percent B on the notes has not confirmed a new high in 10-year prices. The next move in rates is likely to be higher, and that would mean it's time to short bonds. Fundamentals are mixed for the bond with a possible slowing economy and potential Fed easing pointing toward lower rates. However, the short-term charts show that any continuation in the downtrend would be likely after at least a consolidation.

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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