US Treasury Yields Approach Lowest Levels….Ever

Unsurprisingly to us at least, the S&P500 roared back last week….despite all the doom and gloom predictions by pundits in the media… close up 3.2%, which was one of the largest percentage gains on the year. Volume was moderate, and volatility plunged, as would be expected in a week when prices rose. The VIX index fell back close to the lows of the year.

In US economic news, the results were mostly disappointing. To kick off the week, international trade missed. The Dallas Fed manufacturing survey came in with a deeply negative reading. Case Shiller home prices missed badly, suggesting that the multi-year recovery in home prices may be slowing down. The Richmond Fed manufacturing survey also registered a deeply negative result. Personal income missed; personal spending only met expectations. Pending home sales logged their biggest drop since May 2010. Initial jobless claims were a bit worse than expected. Construction spending missed badly. On the positive side of the ledger, Chicago PMI beat estimates. And ISM manufacturing also came in better than expected.

The technical charts now suggest that, in the short-term, the oversold condition from the previous week has been reversed—all in one week, last week. Importantly, however, during last week’s rally, the S&P did not recover above recent tops set in June. Instead, it stopped short off those levels. This sets up a simple test for the upcoming week—if those recent tops from June are not eclipsed, then the S&P could resume its recent downturn. On the other hand, if these recent tops are taken out, then a new all-time high could be established. On the long-term weekly charts however, the two-year topping formation is still fully in effect.

For the last several years, we have been recommending that investors trade US Treasuries from the long side…..which means that one should own them not only to earn interest but to also benefit from price appreciation. In other words, we were betting that rates would come down.

Back in the fall of 2013, when we first introduced this trade, the US 10 year was yielding roughly 3.0%.  And as of last, the yield had dipped below 1.4%.

Amazingly, almost all professional analysts and economists have been arguing that rates would be RISING during this entire three-year period. So all these so-called “experts” have been dead wrong….for three years now and running.

This brings us to the next logical step—where could rates move to next?  While Treasuries are somewhat overbought in the short-term, and rates could back up a bit (the market could take a “breather”), it now is entirely possible that the US 10 year yield could fall to 1.25% over the next several months. What’s more interesting is that when (not if…but when) risk assets finally crash in the US, then the 10 year yield could even approach….or take out…..1.0%.



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