Monday, August 16, 2010

Is The Market Still Bullish on Bonds?

Is the market still bullish on US Treasury Bonds? There was a lot of discussion today about blow off tops in bond prices or that yields could not go any lower. Others were stating that the strong bond market is signaling the equity market that it should get ready to move lower still. So which is it. Here is one view from looking at the activity in the iShares Barclays 20+ Year Treasury Bond ETF ticker: TLT and its bearish half-cousin ProShares Ultrashort Lehman 20+ Year Treasury ETF ticker: TBT. Understand that these are not mirror images of each other but are liquid trading vehicles used by professionals and a decent proxy for the view on Bonds. Look at the charts over the last 4 months:

iShares Barclays 20+ Year Treasury Bond ETF, TLT

ProShares Ultrashort Lehman 20+ Year Treasury ETF. TBT

TLT has been been in a channel between 98 and 102 over much of this period but in a rising trend the month of August. Volume has been fairly steady throughout this time frame. During the recent rise the RSI and MACD have been trending up along with the price. Today there was a big gap up and strong candle today but volume did not change today. This would lead you to believe that today's move was not a blow off top.

TBT has been trending downward but found a range over mid June to the end of July. Volume was steady over that time period. For the month of August the trend has been down and volume has not changed much. During the recent downtrend the RSI and MACD have been trending along with the price. Today there was a big gap down and strong candle with increasing by more than 75% over the recent trend. This might make you consider that a blow off bottom was occurring.

So which one is it? Is the run in Bonds done or is the move higher poised to continue? How about a different explanation. If you are confused as to which answer is right isn't it possible that the market is confused also?

Let me suggest a different explanation as to what is happening. Holders of TLT believe that bond prices can still go higher, meaning that yields move lower. They are unwilling to sell their holdings due to their conviction. Holders of TBT may be in one of two camps. The first one is betting that prices have topped and yields are going higher. In the second camp are those that are holding TLT that are hedging their bets by going long TBT. This is the new money added or increase in volume today.

So perhaps the balance between the long view and short view on bonds is shifting, but only slowly with the longs just hedging their bets. The tell will be what happens on the next move.

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