The “dog days” of summer have turned into the “down days” of summer with the Dow Jones Industrials off more than 600 points since the early August highs.
However, the current, bigger story is the parabolic rise in the price of Treasuries that started way before the August down leg in the market.
Before we delve into that parabolic move, let’s look at the bigger debt picture of which Treasuries are but one piece. Taking a broader view yields (pun intended) two useful results:
It provides a context for the day-to-day price movement of U.S. Treasury bonds.
It reminds us that there is a completely different game (that comingled game of debt and credit) playing out across the globe in different spheres:
municipal state and sovereign debt,
corporate debt from junk to AAA, and
asset-backed debt (mostly mortgage debt).
Most of you know how much I love a well-designed graphic. A good friend and trader in Texas passed this one on to me. I found it especially helpful in looking at the debt big picture. 489-dr-chart1.jpg 40,92К 0 Количество загрузок:
View Larger Image of Graphic
Here is Elliot Wave International’s (www.elliotwave.com) explanation of the graphic:
“Essentially, this configuration graphically depicts current 10-year yields from various issuers. What’s special about this chart is that it shows sovereign, municipal and corporate issues on the same spectrum, so that we can see, for example, how high-yield corporate bonds compare with Greek debt. We chose a parabola to depict the situation of debt issuers because debt gets exponentially harder to repay or refinance as the interest rate rises, especially for large debtors. So problems tend to intensify exponentially the higher up the curve one goes—just as the angle of a parabola’s ascent grows steeper.”
Japan’s long term debt costs remain quite low. This is not because of the perception of economic strength as the Elliott Wave article writer mentioned in his accompanying text but because Japan funds more than 95% of its debt internally.
Short-term debt for highly-rated countries like Japan, the US, Germany and the UK is extremely cheap and has very little room to the downside. The bond market sees longer term debt as less safe. That is, the farther up the parabola you go, the harder it is to repay the interest over time; hence, the higher probability of default.
Back to a Current Trading Extreme
This brings us back to the current price extremes. The long term US Treasuries have had a monster move up over the past few months. The following chart shows how far and how fast this move has accelerated. 489-dr-chart2.jpg 68,14К 0 Количество загрузок:
Like all parabolic moves, this one is unsustainable. The last time I drew a chart with progressively accelerating price moves like this was in the summer of 2008 and we were talking about the unsustainable move up in crude oil prices.
While Treasuries may not have quite reached “bubble” status yet, they are close. That being said, short sellers beware! Thanks to the strong tendency recently for the government and quasi government agencies to add liquidity in the near and intermediate terms, this market can remain irrational for longer than shorts might remain solvent. Still, this parabolic uptrend must soon come to an end. After the snapback begins, look for price to break the support lines drawn on the chart above one by one. Until then…