Posted January 13, 2005

The analytic economic community has been unanimously, and loudly, predicting higher long term rates seemingly forever. During all of 2004 they cited the falling dollar, economy growth, inflation, energy prices, the soaring stock market, the deficit and the kitchen sink as reasons for Treasury yields to go higher, and bond prices to go lower.

I still say there are no real sellers in this market....If you bought a bond every January (see chart below) for the past ten years, your average yield (what interest rate the bond is paying you) is about 6% a year. Aside from the fact you will continue to receive that return for the next 20-25 years, guaranteed by the US Government, the principal value of those bonds is now worth more than you originally put on the table.....With this in mind, would you, personally, want to dump them? And do what with the money?....I doubt it.

Conversely, here in 2005, I believe there is an increasing, and steady, stream of investors, directly related to the demographics of the baby boom, who are now more interested in a guaranteed return on their money than they were pre-2001....Why? Your are nearing retirement. You buy a Treasury Bond today yielding about 4.75%. You receive the interest for 20 years or so. You get 100% of your money back.

This is an oversimplification, but as long as inflation is contained, which I firmly believe it is (that's why the Fed has been raising short term interest rates), I think the equation for bond prices is that of, "No real sellers, plenty of buyers"...here and abroad (where, due to the dollar decline, everything USA might be said to be at a 25% discount compared to 2 years ago).

I strongly believe long term rates are going much lower from here. I strongly believe buying the Treasury Bond Futures market has the potential to be very profitable. This, of course, is one man's opinion and I may be dead wrong, in which case you could lose money.  

Charts and numbers follow.....

If you owned one of these yielding 6,7, or 8% (and this does not encompass bonds bought in the 80's, at even higher yields), that still may have 10-15 years to maturity, why would you sell them?

If we match the June 2003 low in yields, Bond prices would be 12-13 points higher....

 

This is a shorter term look at the same chart. Note that Bonds do not go sideways for long. They are going somewhere.....

They are due to move....?

The next chart is the spot futures contract in Treasuries. Bonds prices go up as long term interest rates go down. This is about the 5th time the market has been on these highs over the past four months. To me, this is either a top, and prices are about to turn down and fall hard (and EVERY analyst I've seen out there will be right), or Bonds have just been soaking up selling, which runs out sooner or later....and then they go up....and I think they do so in a mode I classify as "vertical", i.e., sharply higher, very quickly.

Ten points in two to three months is no big deal in Bonds. On a futures contract, it is $10,000. There are various ways to do this, using options only, or futures with options to define risk, or just plain futures. You can use as little as $1500-$2000 (a unit).

And, if you know charts at all, anything can happen, but this look is about as good as I think it gets. I've seen this chart many times before. There is a very definite potential for Bonds to "suddenly", like two weeks from now, be 3-5 points out of here. 

My bet is this time they don't stop here....and 120 is just not that far away.

The best trades are often the ones where you think you ought to do it, but are scared to do it. I am in this market knowing there are very few people out there who will buy the idea. If you know me and bonds, you know I am not always right, but over the years, I have been a hell of a lot more right than wrong. We have basically been in a bull market in bonds since 1981, and this is not the first time I have seen them look just like they do now. It's going totally against prevailing opinion regarding rates, but I think everything I am thinking makes perfect sense....What do you think?

Give me a call if you want to talk about it....or for more on the subject, the following link will take you to our January5, 2005 posting and our original recommendation.

Thanks,
Bill Rhyne

770-514-1993
800-578-1001