30 Year Bond Tumbles on Bernanke Comment (Chart)

By Bob DeMarco
All American Investor

The 30 Year Bond tumbled 3 points on disappointing comments by Federal Reserve Chairman Ben Bernanke.

It appears that no new bond buying by the U.S. central bank is imminent and this triggering the biggest sell-off in three months.

Bond Vigilantes Take over in the Long End (Graph)

If you were around during the 1980s you know all about the bond vigilantes. When inflation is on the horizon they take over in the long end of the Treasury market.

The 30 year chart above shows that institutional investors are worried about the current policies of the Federal Reserve and Treasury. When this occurs, a interest rate risk premium gets built into the bond. In other words, investors want a bigger cushion to accept the risk of investing in long term Treasury Bonds.

These interest rates look high in comparison to recent history. However, if you are old enough you will remember when the long bond traded above 15 percent. Right now, if you told someone you believed that could happen again, they would tell you -- you are nuts.

They told me I was nuts when I wrote about fire not smoke, when the S and P 500 was in the 1250 area. Nobody thought we could see the stock market fall in half from those levels.

Over the next few years, talk about a downgrade of U.S. debt is going to increase. It appears right now that the downgrade is inevitable. However, it is probably two to four years in the future. The market will discount the downgrade before it happens.

Expect 30 year Treasury bond yields to continue to rise for the foreseeable future. Constant Treasury intervention to try and hold down long term interest rates will fail.

Remember when the Treasury intervened in the Gold market over and over to try and hold prices down?

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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30 Year Treasury Bond Constant Maturity (Chart)

30 Year Treasury, Constant Maturity, Chart



The Chart tells the story.

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30 Year Goverment Bond Signaling Problems Ahead (Chart)

Thirty Year Government Bond, Daily Price.


The 30 year Treasury Bond yield is drifting slowly upwards. This indicates there is little interest in the bond. With a slew of government debt on the horizon this does not bode well.

The thirty year remains a good proxy of future inflation expectations and should be watched closely. This is exactly what we intend to do.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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30 Year Treasury in Perspective (Graph)

The 30 Year Treasury Constant Maturity.



Notes:

• Unless you are over 50 years old, it is probably hard to believe that the 30 year Treasury bond traded above 15 percent.
• In 1982, you could have bought a $1,000,000 Treasury zero coupon bond for $15,000. This allowed you to lock in a compounded interest rate of 15 percent for 30 years. Imagine investing $15,000 of your IRA or 401K and watching it grow, risk free, to $1,000,000.
• Recently, the 30 year spiked down to the 2.50 percent area and right back to the 3.50 percent area.
• The low yield for the long term treasury bond is in, and rates should begin to move higher soon.
• Interest rate trends tend to persist. They tend to last for long periods of time.
• The spike low in the 2.50 area on the long bond is evidence of a final extreme in long term rates.
• Interest rates tend to go to an extreme when making a high or a low.

Yields on actively traded non-inflation-indexed issues adjusted to constant maturities. The 30-year Treasury constant maturity series was discontinued on February 18, 2002, and reintroduced on February 9, 2006.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Ten Year Treasury Perspective (Chart)

Notes:

• Every time I look at this chart I think about 1978-82.
• During that period it was not unusual to watch the 3 month Treasury bill move 50 basis points in a day.
• On a slow day the trading range in the Ten Year was a point and one-half.
• Interest Rates on the Ten Year Treasury rose over 15 percent. Mortgage rates also moved above 15 percent.
• Everyone was so bearish they wouldn't touch the Ten Year or Long Bond.
  
• I continue to ask myself, will we see double digit ten year Treasury rates again?
• The obvious answer is, YES.
• Flash forward 30 years.
• The Ten Year is trading at 2.91 percent. Will rates ever go up?
  
• It looks like the Ten Year is making a low in this area.
  
• A close above 3.125 percent would indicate higher interest rates and a trend change.
  
• I learned a long time ago that trends start when you least expect them.
• Once a trend starts it tends to persist for a long time.
• One thing I know for sure -- rates always go a lot lower, and a lot higher than you could have ever expected--at the extremes.
• Investors should be thinking about ways to take advantage of increases in interest rates.
• Once rates start up they should do so for many years.
  

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.