BONDS COME UNDER PRESSURE -- INTEREST RATES RISE -- SHORT-TERM RATES REFLECT UNCERTAINTY

BONDS MOVER LOWER ... Today's Market Message was written by Arthur Hill. - Editor

Bonds are coming under pressure from the prospect of increasing supply. The bailouts and stimulus package will require the government to raise large amounts of money through bond auctions (sales). Today, the government is set to sell a record $22 billion in 7-year bonds. The 7-Year Bond was brought out of retirement to fulfill current financing needs. Chart 1 shows weekly bars for the iShares 20+Yr T-Bond ETF (TLT) over the last three years. TLT broke a major resistance level with a big move above 95 last year. Bonds went berserk as investors sought a safe-haven in the fourth quarter of 2008. The flight-to-safety ebbed in 2009 when bonds turned their focus elsewhere. On the price chart, the trendline extending up from June 2007, broken resistance and the rising 40-week moving average mark a support zone around 95-98.

Chart 1

Chart 2

Chart 2 shows a clear downtrend for 2009. TLT tried to break above the blue trendline this week but failed and broke the lower pennant line early today. With a clear downtrend underway, the pennant break signals a continuation lower with a downside target towards the prior consolidation (yellow area). The bottom indicator shows RSI meeting resistance at 50 over the last few weeks. Momentum favors the bears as long as RSI holds below 50.

INTEREST RATES MOVE COUNTER TO BONDS... As bonds move lower, the 10-Year Note Yield ($TNX) moves higher. Chart 3 shows the 10-Year Note Yield rising throughout 2009. TNX broke resistance around 2.6% (26 on the chart). Broken resistance turned into support in February as rates bounced over the last four days. Broken support and the falling 200-day moving average mark the next resistance zone around 3.4-3.6%. Not only does the government have to raise more money, but it also has to pay a higher return as rate rise.

Chart 3

SHORT-TERM RATES REFLECT UNCERTAINTY... Short-term rates are still at extremely low levels. Chart 4 shows short, medium and long-term treasury rates. In December, the 3-month T-Bill Yield ($IRX) was around zero percent. This was the safe-haven peak. Investors were willing to receive no return on capital simply for the guaranteed return OF their capital. The 3-Month T-Bill Yield has since risen back above .03% (3 on the chart). It is still very low by historical standards and has yet to return to pre-crisis levels (1.4-1.8), but higher yields show less demand for this ultimate safe-haven. Look for a move back into the pre-crisis zone to signal a return to normalcy. That, however, could take some time.

Chart 4