The Daily Trading Report

US Treasuries
Long term US Treasuries are engaged in a bear market. Although we try not to have preconceived ideas we suspect (for various reasons) that this downtrend will last for considerable time (years as opposed to months). Note where the ETF TLT is failing…..it appears to be right on the long term down trend line and more or less at the previous support level at 95 (this has now become resistance). Yes you could accuse us of being a little premature in the conclusions we are coming to with regards to TLT…..but it is not in our nature to sit on the fence.

Long dated or short dated US Treasuries?
The chart below suggests that long dated Treasuries are the last place to be (I guess because of inflationary concerns). The downtrend appears reasonably strong.

Relative Performance of Treasury Markets and Implications for the USD
If the chart above is a little random to you the chart below should appear somewhat less random. It is essentially sovereign bonds of developed countries (JGBs, Bunds, UK Long Bond, Aussie 10 yrs etc) relative to the US 7-10 year treasury ETF “IEF”. Clearly US Treasuries are not the desired place to be from a fixed income perspective. This is a strong upward trend and from a short term perspective it appears that the trend wants to continue upwards. The behavior of the chart below also has important implications for the USD Index. Whilst US Treasuries continue to underperform other developed nation’s treasuries we would continue to be short the USD.

Emerging Market Bonds. We also note that emerging market sovereign debt (Government debt of emerging market nations) is outperforming US Treasuries. Either which way you look at it, from a fixed income perspective US Treasuries are the last place on the planet to be (albeit on very near the bottom of the pile).

Corporate Bonds What about the corporate bonds? Both investment and high yield corporate bonds remain in bullish up trends. High yield bonds have weakened somewhat as of late (coinciding with weakness in equity markets) however, the weakness has yet to transpire into a bearish sell signal. For now we are treating the weakness in junk grade bonds as a “consolidation”. For us to get bearish on junk grade bonds we need to see corresponding weakness in investment grade bonds.