Did Anyone Hear A Growl??

Bears start reign over US Treasuries

The biggest bull market in US Treasury bonds is over, according to the analysts who rely on historical price patterns to make their assumptions.Tuesday, April 24, 2007The biggest bull market in US Treasury bonds is over, according to the analysts who rely on historical price patterns to make their assumptions.
The proof that it now pays to be bearish can be found in financial futures based on the government's 4 percent bond maturing in 2037, a benchmark for the 22-year, 11-month rally that began in May 1984 and ended April 6, says John Kosar, president of Asbury Research in Lake in Illinois.
That was when the price of 30-year Treasury bonds for delivery on the Chicago Board of Trade fell below 110 and signaled a new direction for the market.
The turning point was so obvious that even "a five-year-old who has a ruler and a pencil can draw a line under the lows and make a determination" that bond yields have bottomed and are poised to climb for many years to come.
While former traders like Kosar do not get much respect in academic circles, they insist their charts confirm what some investors already know: "that inflation is the issue," he said.
The Federal Reserve's preferred measure of inflation, the price index for personal consumption expenditures excluding food and energy, has been 2 percent or higher since April 2004.
In the previous eight years, it topped that level during only six months.
Core inflation was as high as 4.7 percent in 1984 when 30-year bond yields rose to 13.9 percent.
"There have been only three reversals into rising rate cycles in the last 200 years; we are in the fourth," said Louise Yamada, who runs Louise Yamada Technical Research Advisors in New York. Yamada says that while previous bull markets in US bonds ranged from 26 to 37 years, the most recent one was the biggest.
Investors who bought Treasuries in 1981 reaped almost twice the returns as those who bet on the Standard & Poor's 500 Index.
Bill Gross, chief investment officer of Pacific Investment Management, says yields must rise to attract the foreign capital needed to finance record federal budget and trade deficits.
The Congressional Budget Office estimated that the deficit will widen to US$304 billion (HK$2.37 trillion) in fiscal 2009. The gap in goods and services traded totaled US$58.4 billion in February.
A 1 percentage point increase in the deficit as a share of gross domestic product, lasting for three years, adds as much as 0.5 percentage point to 10-year note yields, according to a 2005 study by the National Bureau of Economic Research.
The rally began October 1, 1981, after then Fed chairman Paul Volcker boosted the central bank's target for overnight lending rates to a peak of 20 percent to stem inflation that was running at a 14 percent annual rate.
The yield on the benchmark 30-year Treasury rose as high as 15.21 percent October 26, 1981.
Treasuries gained through the 1980s and 1990s as Volcker and his successor Alan Greenspan brought consumer price increases under control. Greenspan cut inflation below 4 percent.
The 13 percent bond due in 2014 that the government sold May 15, 1984, returned an annualized 24 percent.
The S&P 500 returned 13 percent, including dividends, during the same period. Bonds gained more than shares of Motorola, DuPont and Duke Energy.
Foreign investors and central banks also drove down US yields by doubling their holdings of Treasuries to US$2.1 trillion in the five years ended February.
The three previous shifts from declining rates to rising ones in the 206-year history of US yields lasted two to 14 years, Yamada said.
She analyzes trends using a mixture of interest-rates on foreign loans to the republic in the late 1700s, yields on New England municipal bonds in the 19th century, and high-quality corporate and Treasury yields in the past 100 years.
The rise in bond yields from 1946 to 1981 "was the modern world's greatest bear market in bond prices," said James Grant, publisher of Grant's Interest Rate Observer in New York.
The decline in yields to four-decade lows in June 2003 "began what may prove to be another long-lived march upward, and will probably carry longer and further than people can imagine."
Technical analysis was used by rice farmers in 17th-century Japan to monitor and forecast crop prices.
It was popularized by Charles Dow, creator of the Dow Jones Industrial Average in 1896.
Technical analysis is based on the theory that a chart of the price of any asset or index contains clues about future movements.