US Treasuries…”Confounding the Experts”….Again

The S&P500 ended the week up very slightly, specifically 0.3% on lower volume than the week before when the S&P fell. Once again—there seem to be more sellers than buyers. Volatility dipped, however, as one would expect during an up week.

Technical analysis is painting a mixed picture. On the daily charts, the 50 day moving average has been decisively broken. And now, the S&P being a bit oversold, has a good chance of recovering back up to the 50 day moving average. At that time, the S&P will be at a cross roads, again—if it jumps back above, and stays above, the 50 day moving average, then the recent sell-off will have been nullified, again. But if the 50 day moving ¬†average acts as a ceiling, or resistance, then the S&P may turn down again, and possibly approach (and test) the 200 day moving average for the first time in almost two years.

On the weekly charts, the S&P’s uptrend is still intact, with the recent sell-off being barely a blip on the long-term uptrend. Prices are still above the 200 day moving average and this average is still sloping upward.

Macro news was light last week. Factory orders beat expectations, as did the ISM services index. But PMI services missed expectations. Initial jobless claims fell back below 300,000, but wholesale trade badly missed consensus estimates.Next week, the volume of economic reports returns to a more normal level.

First it was Bloomberg reporting recently how badly it’s panel of 100 economics experts called the direction of interest rates in the US this year, and now it’s the New York Times taking a turn.

Over the weekend, in a cover story titled “Yields on 10-Year Treasuries Fall, Confounding the Experts”, the paper reveals to the general public how badly the so-called market experts fared in calling for the direction of interest rates in 2014. As we all know by now, the experts called for rates to rise. But instead the fell and they fell by a significant amount—from roughly 3.0% on the US 10 year at the start of the year, to roughly 2.36% at the lows last week,

This has resulted in huge losses for the investment and trading firms that the experts advise. Why? Because as the firms were making huge bets that rates would rise, these bets have generated huge losses. And as mentioned here the last time interest rates were discussed, these bets have not yet been terminated; this means that many of these firms are sitting on billions in unrecognized ‘paper’ losses hoping that interest rates turn back up and reduce those paper losses.

What’s sad is that these firms have been waiting for almost nine months for rates to turn up. Instead, rates have only proceeded to make drop lower and lower every quarter. In fact, last week’s 2.36% on the 10 year was the lowest level of the year.

Is this trend (to lower rates) over? Not even close. While risk asset markets (mostly equities) still hover near all-time highs, this is not to exit bets that Treasury rates are done falling. Only after equities enter a serious correction will that time come. And until that happens, some really smart money is staying long US Treasuries and winning….confounding the experts.

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