LT's relative strength

[LNGTERMER]

It seems the LTs are getting cheaper from historical perspective. I see TLT entering its support bands any one has a prediction/analysis for this?. For the VP I don't see it attractive yet till it shows relative strength against the equities though.

[MediumTex]

If LT yields go over 5% there is going to be a heap of trouble in the mortgage market.

I just don't see the catalyst for a sustained move higher in yields.

[Plumbline]

If the yield breaks above that level, I suspect there will be trouble.  I also suspect the Fed will draw a line there and do everything it can to contain the situation.  Otherwise, things could get out of hand.  I like owning gold here.

KevD - Couple of questions to help me learn:

1. When you say there will be trouble & things getting out of hand please elabarate.  I understand mortgage rates go up as MT points out, but is 5% yield some sort of magical threshold that says "The Fed is irrevalant", and if 5% is broken, what is the trend and why?

2. In todays environment, how does gold perform against a rising LT yield?  Up because Fed pumps more to keep LT rates down?

Thanks

[LNGTERMER]

I like to look at $TYX, the chart of the 30-year yield.  The long-term downtrend line is at about 5% (we are currently at 4.70%).

It's actually currently on the trend line from the start of 2000, so will see if that line holds, relatively however, it has to show weakness vs TLT and I do not see that yet. I think the makings of resistance has been forming as of late so will see if a trading apportunity arises in the next a few weeks.

[MediumTex]

The trendlines for both these maturities have held for 30 years as they have been fiercely defended at those levels. If the trendlines break, that will be a shock to the bond market, which would spill over into all other markets and the economy.  Among other things, it's the signal that the Fed has lost control.  (Yes, the Fed only directly controls the short end of the curve, but many believe the Fed intervenes to keep the longer interest rates within certain bands, and lower rates have that been an explicit objective of quantitative easing.)

If you read Bernanke's writings about how to combat a liquidity trap, he is very clear that the proper strategy to pursue (in his view) is to buy further out on the yield curve as part of QE-type programs.

It's hard for me to imagine a U.S. economic recovery with mortgage rates rising along with 10 year yields the way that have been of late.  The fact that Bernanke said he would do everything in his power to prevent this exact scenario makes me inclined to believe him.

I think what we are seeing right now is an overbought stock market getting ready to run out of steam and an oversold bond market getting ready to begin a mean reversion.

To think about it in a different way, in a few months the stock market will make a new all time high if the current trendline continues.  Does anyone think there is any basis for stocks to be making new all time highs?  I'm not saying it won't happen, but it just seems like a ridiculous thing to even be talking about with 10% unemployment, a depression in housing prices, static wages, a secular deleveraging trend in its early stages, and the rest of the well-known economic headwinds.

The next few months will be interesting (or whenever this stock market rally stalls).  I have no idea how it will unfold, but a stock market correction (not a crash, but perhaps a 10% or so decline) accompanied by a strong bond market rally seems like the path of least resistance.

I think gold will continue grinding higher regardless of what happens in the equity and bond markets.

[LNGTERMER]

P.S.  Trendlines are drawn with a crayon, which means the lines are not exact and people can differ on where exactly they should be drawn.  But we're getting into dangerous territory here, with momentum on it's side.  If I were to put on my speculator's hat I would say the stock market is extremely overbought right now at the same time that the bond market is extremely oversold.  That suggests to me that sometime in the near future, we may get a correction to bring things into equilibrium.  I hope that's the case anyway, but with PP, it doesn't really matter.   

That is correct to add to your point,they are just a tool to clarify the big picture of the present in the context of the past and have zero predictive value.

It's amazing thought to see the correlation between stocks and Treasuries manifesting itself clearly on the charts. It shows clearly money chasing yield and explains the zigzag moves of the 60s and the 70s as well as the stocks upward trend since early 80s. The treasury yield has been on a downward decline ever since the early eighties and the current up ward tick by no means breaks this trend.

It seems the lower the FED brings the rates the harder it becomes to raise back to the previous level without creating some kind of havoc.

[Reub]

And it is the third year of the Presidential Cycle!

[LNGTERMER]

A final point I would like to make is that even though relatively the bonds do seem cheaper the big news remains that the future is still unknown.
Companies are flushed with cash, they mostly cut cost during the melt down, so the current valuations may not be out of whack-Or it might be-. Add to that the fact that credit is very cheap right now and any predicting of the future becomes even fuzzier. The wisdom of the PP to re-balance and stay the course is very important. Either the equities will reverse course and the bonds will step in to carry the day or the equities will continue their current rally. The PPers will do fine by just keep re balancing by selling the winner and adding to the weak.