US Treasuries on Sale?

As expected, the S&P500 bounced back last week, gaining almost 1.4% . But the volume was extremely light, even considering that the week was shortened by the Labor Day holiday. So this bounce was certainly not a sign of any meaningful rush back into stocks by investors or traders. Volatility slipped slightly, but not nearly as far down as it had in the weeks during mid-summer.

Technically, the S&P500 will soon approach a test that we alluded to last week. The S&P has consistently over the last year avoided serious damage in the weekly charts, even though it has had many minor bearish pullbacks on the daily charts. For this bullish pattern to repeat, the S&P must re-capture 1,700 fairly soon, say over the next two weeks and then continue on to establish new highs. If this were to happen, then the still bearish signatures in the weekly charts will flip back over to being bullish. But if not, then the S&P could finally enter into a more meaningful downturn, a downturn that has been missing since the summer of 2011.

US economic news continues to be mixed. International trade data slightly missed expectations. The PMI manufacturing index also missed. But the more important ISM manufacturing index beat expectations, and this perversely hurt the markets because it again supported the view that the Fed will begin to taper its QE program this month. Initial jobless claims were also somewhat better than expected, as were factory orders. However the big number of the week—payrolls—did disappoint. Total jobs created were lower than predicted. While the headline unemployment rate fell, this was all due to job-seekers dropping out of the labor force (not good), as opposed to getting new jobs (good). The eroding Labor Force Participation Rate, which fell to a 35 year low, confirms this negative trend. Another problem was that the two prior months of jobs figures were slashed.

So once again, the US economy is limping along. It’s certainly nowhere near reaching the much anticipated ‘escape velocity’ that has eluded it for over four years now.

In the financial markets, interestingly, the US Treasuries continue to sell off. While we have discussed how this trend may signal negative consequences in many risk markets, such as stocks, Treasuries themselves have not sold off so much that they themselves have become one of the few asset classes in the US that are now somewhat cheap.

The US 10 year note which yielded less than 1.5% in the summer of 2012 and reached about 1.6% as recently as May of this year, is now yielding almost 3.0%. In other words, the yield on this note has just about doubled.

But another way of measuring its value as an investment is to compare the difference between the yield on the 10 year note versus the yield on Treasury bills. This ‘spread’ is now nearing all time highs. And to take advantage of this wide spread, investors might want to consider buying the 10 year note in the expectation that the spread will compress by a reduction in the yield of the 10 year, not by an increase in the yield of Treasury bills, which the Fed has shown no signs of raising anytime in the near future.

So while almost every asset class in the US continues to be over-priced by most historical measures, it’s good to see some assets finally going ‘on sale’ even if only slightly.

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