10 Year Treasury Models

[nodoodahs]

Both these models are still sending signals for lower yields, but relatively weak signals.

The quarterly model is now in the 7th decile (10th being largest odds of decline in yield).

The 6-month model is in the 7th decile as well, but this model has the 10th decile as being largest odds of increasing yield, and a 7th decile reading is a moderate decline in yield for the 6-month model (the data set it's built on contains a history of mostly declining yields).
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[HenryTo]

Speaking of which, nearly 90% of folks are now saying that yields will go higher in a recent Yahoo Finance poll:

http://post.polls.yahoo.com/quiz/financeresults.php

[HenryTo]

Yieldsafe,

Thanks for the post - even though I believe yields bottomed in June 2003, I am also looking for a tradeable bounce in the near future.

BTW, don't forget the readings of the HBNSI. The last reading I have (Monday evening) has newsletter sentiment at negative 41% - which is very bullish from a contrarian standpoint. That being said, the last time bonds made a ST bottom, the negative sentiment in the HBNSI actually hit a very extreme reading of negative 70%.

Take care,

Henry

[YIELDSAFE]

Based on my treasury bond model, I believe treasury bonds are due for a bounce-back rally within the next 2 months. My valuation indicators are reaching extremes, indicating that higher bond yields are making bonds more attractive relative to stocks. In addition, treasury bond sentiment, as measured by Market Vane, is reaching the most bearish level in over a year. This would indicate that the crowd is panicking and selling bonds which is the best time to be buying as a contrarian. In addition, the smart money, commercial hedgers, are in the most net-long position of treasury bonds, +151187 contracts, in over 7 years. At the same time, the small traders, -62370 contracts, and large speculators, -88457 contracts, are in the most net-short position of treasury bonds in over 7 years. Given the large commitment to opposite extremes, I would have to put my money on the side of the commercial hedgers, net-long on treasury bonds.

[HenryTo]

My guess is still higher-yields ahead (perhaps a 30-year yield of close to 5% or even above), and then a significant, playable reversal. Again, I may go ahead and buy some T-bond futures if/when that happens.

Best,

Henry

[nodoodahs]

The 13-week model is predicting higher yields now, a mid-4th-decile reading, suggesting a yield edging into 4.70's.

The 26-week model is predicting lower yields now, again a mid-4th-decile reading, suggesting a yield edging into 4.40 to high 4.30's.

Interesting divergence.
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[jim67]

TRS & Henry,

Thanks for your most informative replies...You've given me some alternatives that I will definitely consider.

My best,
Jim

[HenryTo]

Jim,

I apologize for the mishap. I hadn't traded the Rydex funds for a few years and the last time I traded them, my discount brokers (Schwab & E-Trade) charged an exhuberant an upfront amount just to buy and sell those funds (something like 1% per round turn).

I just checked and it looks like they don't charge that upfront fee anymore.

I have traded TLT before and I love it - you can margin that as well as trade it on a real-time basis as opposed to having to wait until the EOD. If you want higher leverage and an even lower transaction fee, you can check out the 10-year and 30-year futures (note that this is not intended as investment advice!)

Have a great weekend,

Henry

[TRS]

Jim

You could play an expected fall in the 10 yr bond yield by going long the TLT. Also the TLT has options available, you could buy calls for lower expected yields or buy puts for increasing yields.
The TLT mirrors the $TNX, check comparison charts to see.

good luck

[jim67]

Henry,

You said this, "I usually stay away from Rydex and Profunds because of their relatively high commissions".

I know this for a fact -> they charge NO commissions.

Are you referring to Fund Operating Expenses (Investment Advisory fees, 12b-1 fees, etc.)?

Jim

[HenryTo]

Try this. 125% isn't much, and I usually stay away from Rydex and Profunds because of their relatively high commissions.

http://www.profunds.com/profiles/profile.asp?id=68

The U.S. Government Plus ProFund seeks daily investment results, before fees and expenses, that correspond to 125% the daily price movement of the most recently issued 30-year U.S. Treasury Bond ("Long Bond").

[nodoodahs]

26-week 10YT model uses annual change in 10YT yield, M3, SP500 Index, the M3 annual change from one quarter ago, and the square of the FFR annual change and the square of the USD Index change over the last quarter.

13-week 10YT model uses square of M3 and prior quarter's M3, M3 and prior quarter's M3, square of last six month change in 10YT, last six month change in 10YT, and last quarter's change in SP500 index.

Using both annual M3 change and the M3 change from a prior date allow for a measure of acceleration as well as speed (2nd as well as 1st derivative, however you want to characterize it), nothing magic about annual change measured a quarter apart, I'm sure other timelines might work just as well or better. In back-testing to 1982, signals in this range for the 13-week model are 65% likely that yield will be lower in a quarter.

Some of my earliest work on 10YT yield suggested that the current yield is a function of recent M3 growth and the FFR input.

Short-to-mid-term, it’s anyone’s guess. Longer-term, I think the Fed will raise to at least 4.5 while the money supply inflation accelerates even more, and so if I had to bet on a yield for 2007 it would be quite a bit higher than today’s.

I would have thought Rydex had a fund like you suggest, but I didn’t see one listed in my brief search for it …
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[jimprit]

I have long thought that the current spike in interest rates is a precursor to a situation where interest rates will be lower than we have seen in a long time. How could one best play this potential trend? Is there a mutual fund out there that leverages as to profit from a drop in interest rates? Any other ideas on how to play this potential trend?

[nodoodahs]

Still a 7th-decile signal for weaker yield from the 13-week model. The 26-week model is giving a slightly stronger signal for weaker yields. From Friday's close.
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[nodoodahs]

Ditto. Slightly stronger 13-week signal for lower yields but both 13- and 26-week models signal lower yields.
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[nodoodahs]

The 13-week model is giving a slightly stronger signal for lower yields, the 26-week model is giving weak signal for lower yields.
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