A significant change in trend in the U.S. Treasury bond market happened last week. The yield on 10-year U.S. Treasury bonds rose 0.25 of a percentage point to 2.298 per cent, a gain of 12.8 per cent for the week. Conversely, the price of the iShares long-term Treasury Bond ETF fell 3.91 per cent. The change came at a time after yield and price on long-term U.S. Treasury bonds had been stable for the past five months. Stability was attributed mainly to the Federal Reserve's "Operation Twist" where the Federal Reserve substituted short-term Treasury holdings for longer-term holdings.
The break by the 10-year Treasury yield above 2.00 per cent triggered an avalanche of selling. iShares on long term Treasury bonds quickly broke support just below $115 on higher-than- average volume. Intermediate technical trend changed from neutral to down.
Weakness in bond prices was triggered by a series of recent economic events, including an encouraging February employment report released on March 9th, comments by the Federal Reserve's Open Market Committee last Tuesday implying little chance for a third Quantitative Easing program and comments by Federal Reserve Chairman Ben Bernanke last Wednesday that implied steady monetary policy. Traders are guessing that rising inflation rates announced last week, combined with encouraging economic reports, will prompt the Federal Reserve to curtail its easy money policy before the end of 2014.
Traders quickly took advantage of falling Treasury bond prices by purchasing inverse Treasury Bond ETFs. The most actively traded inverse ETF was the Lehman 20 year + double leverage ETF . Volume in the single inverse ProShares 20+ Year Treasury ETF also spiked. The Canadian leveraged equivalent is the Horizons Inverse 30 year Bear + ETF , a product that has double leverage, trades in Canadian dollars and is hedged against U.S. dollar risk.
Weakness in long-term U.S. Treasury bond prices is not unusual at this time of year. Prices have a history of moving lower between February and the end of April.
The change in trend by U.S. Treasury yields and prices is relatively new. Look for long-term Treasury prices to continue their downtrend until at least the end of April.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Daily reports are available at www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.