Thursday, December 9, 2010

Potential for a Bounce in Bonds

Bonds continue to implode (yields keep rocketing higher). Bonds keep breaking through support level after support level. You can see that timing comes in early next week (pink bars on the 30-year US Treasury ZB H1-D) and today is day 46 of the crash (crashes often reverse around days 45-49), so a bounce or bottom should not be a surprise.

I have included charts for US Treasuries of different maturities IEI (3-7 year), IEF (7-10) and TLT (20-year), as well as the Inflation-adjusted US Treasury (TIP). You can see that they have fallen to or below the key 200-day moving average. This is a level at which institutional investors tend to defend price.

The Investment Grade Corporate Bond index (LQD), the Aggregate Bond Index (AGG) and the Preferred Stock ETF (PFD) have also fallen to support.

Municipal Bonds (MUB), California Municipal Bonds (MUC) and Build America Bonds (BAB) are now testing the lows hit last month

Many are now saying that the Build America Bond program extension was not included in the new Tax Cut Proposal, because the Republicans want to make the big economic debate in 2011 centered around whether or not the US should bail out bankrupt states and their union workers. I still think that the plan will be extended. You can see the consequences to the Bond Market if it doesn’t.

Let’s see if bonds can put in a low over the next week or so. It may be a low over some serious consequence.