Sunday, May 12, 2013

What If Treasury Rates Are Going Up Sharply?

In the last two weeks long-term U.S. Treasury rates have been steadily rising. The charts of l-t tsy bonds, rates, and the dollar, are starting to suggest that Fed may be on the way out of the treasury market. If this is the case, the rates may rise rapidly due to the largest buyer sidelined.
So I decided to plot TLT over TNX and DXY to show the latest development. Also, I went back to when the interest rates bottomed in the major way in 1994. The most interesting fact is that back then, when TNX started to skyrocket, SPY went down and did not see the same level for exactly one year. Are we going to see the same scenario now? Only time will show, but we need to monitor this development. TNX chart now looks similar to the beginning of 1994.

click on charts to enlarge


  1. You reference 1994.

    SP' went from 500 to 1500s in just the next 5yrs, and that was without QE, or the HFT 'melt higher' algo-bots.

    Besides, why would the Fed end QE now? The whole point is to keep rates LOW, and their target is 6.5% jobless anyway.

    QE into late least.
    Have a mighty week in market land!

  2. Permabear Doomster, all good points. But I can't see 5 years out. Neither do I care about HFT or algo-bots, since their trades are 5 seconds to 5 minutes to 5 days. My time frame is 5 weeks to 5 months from now. So I showed the similarity, while questioning the possibility and therefore giving my readers heads up. I understand your frustration with this Fed-manipulated market, and share it as well. This said, if the Fed gives a hint of tapering their treasury and mbs purchases (and incertion of "Increase or Decrease" in the last FOMC statement could be such), rapidly rising rates could be the result. Remember, it is the perception and anticipation of the policy shift that matters the most in the beginning. Late summer, you are referring to, is just around the corner. It took stocks one year to adjust to rapidly rising rates in 1994. This scenario could repeat.
    Thank you for reading my blog!