U.S. Treasury Bond Yields Advance, Inflationary Pressures Continue

By: Donald_W_Dony

After several years of declining bond yields, rates are now starting to climb again. Yields across the US curve are beginning move above previous resistance levels for the first time in over two years. Rising fixed income yields are part of a recovering economy and help to reinforce the future investing outlook of higher inflationary pressures.

The Fed began to retract US Treasury yields aggressively starting in late 2007 in response to the economic slowdown. Rate reduction is one of the main tools that the central bank employs to help stimulate a weakening economy. Short-term yields (Chart 1) were affected the most. 3-year Treasury bond rates fell from about 6% to below 1% in 18 months. As the stock market has bottomed in early 2009 and the US economy has shown many signs of renewed growth (4th quarter GDP was 5.9%), yields have started to rise in earnest again starting in 2010. The recent movement in the 3-year yields have broken a technical barrier that have been in place for 34 months. The downward trend that began in mid-2007, has now been broken. The first target is 2.0% by mid-year.

Mid-term yields (Chart 2) are also being driven higher by the stabilizing US economy but at a more gradual pace. 10-year US Treasury rates dropped from over 5% in July 2007 to below 2.2% in December 2008, only to rebound in 2009 and 2010. Yields are now beginning to break through established resistance levels. As buying pressure continues to build for 10-year yields, the current upward trend is expected to remain in place into the second half of 2010. The first target is 4.3%.

Long-term yields are traditionally the last to advance in the yield curve. 30-year US Treasuries (Chart 3) have also rebounded with the expanding US economy but not to the same extent as shorter bond durations. Though 30-year yields have followed the 3 and 10 year yields higher during the past 16 months, they have yet to break through key resistance barriers. 4.75% has represented a solid yield ceiling since May 2008. Bond traders have kept a selling stance on 30-year bond prices since Q4 2009. As bond prices decline, yields rise. The 4.75% resistance line is expected to be broached in April with a first target of 5% anticipated by mid-year.

Bottom line: US bond yields are no longer declining or even remaining flat. Rates are starting to rise again. Bond yields normally follow the economic expansion. GDP in the US has been improving over the past nine months and the trend is expected to persist into 2011. Short-term yields are anticipated to advance the quickest followed by mid-term (5 and 10 year) and finally long bond yields. Bond prices (Chart 4) are now into a long-term downward trend. The first target is $110.

Investment approach: Advancing rates are part of a growing economy. Yields are expected to continue increasing as long as the present business cycle expands. Models indicate that the average economic cycle is 4.5 years. Rising fixed income rates are also part an inflationary environment, as are escalating commodity prices. Investors should consider positioning their portfolios to reflect this main underlying tone.

More research will be available in the upcoming April newsletter. Go to www.technicalspeculator.com and click on member login for the complete report.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2010 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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