No Longer Bullish On Bonds, But Was July 2012 the Top?

Prechter's latest Elliott Wave Theorist issue (February 2015) repeats his call that the July 2012 low in the 10-year bond yield (1.46%) is a major, multi-decade low.

Although recently we have thought of bonds as the flight to safety asset (moving inversely with stocks), he correctly points out that bonds and stocks have been going in the same direction since the mid-1960s. Both have been in a huge bull market.

I had thought that bond yields cannot rise until after the stock market has crashed, because the government could just refuse to bail out the stock market and thereby "chase" people back into bonds. But I had not considered that people need to view bonds as perfectly safe in order for that to work. And treasuries clearly are not perfectly safe.

That makes them vulnerable to going down with stocks when social mood becomes more pessimistic. The only thing that would rise would be the dollar - which of course has had a massive breakout.

And you see that there have been a series of higher lows in the ten year yield after the July 2012 low of 1.46%. First, April 2013 was 1.66% and then January 2015 was 1.68%.

I am officially open to the possibility that bonds have topped.

Value In The Five Year Note - Tight 5s/10s And 5s/30s Because The Five Year Hasn't Caught Up Yet

I mentioned in December,

"I think the value is in the 5y note. You get 1.65% yield vs 2.77% on the 30 year."

That was a spread of 112 basis points. Now the five year yields 1.57% and the 30 year yields 2.6%; the spread has decreased to 103 bps. An extra 25 years costs the treasury only 1% a year! How can they not be terming out all their debt right now?

Five year/ten year yield ratio.


Five year/thirty year yield ratio

Trouble With The Curve?

Hardly. This was a good year to be long the long bond.

But this week was time to rotate out of long duration and into something that looks more attractive.

I think the value is in the 5y note. You get 1.65% yield vs 2.77% on the 30 year.

See what other countries' five year paper is yielding:

• France, 21 bps
• Germany, 4 bps
• Italy, 1%
• Portugal, 1.4% (!)
• Japan, 3 bps

All lower! So, the U.S. 5y looks like a value to me relative to other countries, to the fed funds rate (much higher) and to the 30 year yield (only 112 bps lower).

If you agree that the USD is the best currency to own right now, then it's doubly strange for U.S. rates to be higher than these other countries'.