Summary
Short and long-term Bonds moved up to give a Buy signal since July 25,07, however caution is advised since the primary trend is down.
It appears short Rates are peaking with their 6 year cycle high in late 2006 and will likely head lower into the next cycle low
in late 2009. Long Bonds may have peaked with their 6 year cycle high in early 2005 and are probably headed lower into their
next cycle low in late 2008. With the Yield curve already heading lower after spending much of 2006 above 1.0, the spread
between short and long Rates is likely to increase until the next cycle high in late 2008. Buying the short end and selling
the long end would be a one way to take advantage of a widening Yield Curve.
A Fed pause near a 6 year cycle high suggests lower short Rates
The first major event regarding interest Rates is the first pause in August 2006 for this Fed cycle that began in 2003. The recent
rise of the 2 year Note above its 200 day moving average after years of decline supports the view that short term Rates are likely
headed lower into the next cycle low in late 2009.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
30 Year Bonds appear to be completing a large rounded top formation
The second major event was the 30 year Bond breaking below a 20 year uptrend line and suggesting a break of the 100 level by its
6 year cycle low in late 2008. The 30 Year had been making lower momentum highs with each successive 6 year cycle high since 1980,
and the last one in 2005 was made with a lower momentum divergence. Also of interest from a contrarian perspective is the fact that
Bonds were perceived as the unlikeliest to crash or come down severely as recently as 2005. A shorter cycle is giving us the retest
of the broken 20 year uptrend line, but the downtrend in long-term Bonds should continue into the next 6 year cycle low in late 2008.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com
The Yield curve confirms that long Rates are unlikely to follow short Rates
The Yield curve has been inverted for most of 2006 increasing the risk of a recession in 2007. It has since turned down sharply in
early 2007 due to subprime concerns, which are likely to negatively affect the economy, possibly to the point of recession.
This chart suggests that the Fed will have to lower short-term rates to mitigate the negative effects of higher long-term rates
and the subprime mortgage problems.
Charts courtesy of StockCharts.com
Charts courtesy of StockCharts.com