Monday, March 17, 2008

10 Year Note Trend Shift

Today market the time and price objective for our forecast in the 10 year note.

Notice also that it happened to coincide with a touch on the lower end of the trading channel, which should signify at the very least a leveling off in interest rates, if not an increase of sorts.

The rally in the 10 year note has been quite impressive, as at the time of the forecast I myself thought it to be a bit of a stretch to reach the levels the market was indicating it may well achieve, but lo and behold, here we are.

This area, all the way down to 3% even, may well end the cyclical bull market in the bond market that has been living now since 1981, yes 1981! The bond market has enjoyed a 27 year bull market as rates have moved from a high in 1981 of 15.68% all the way down to present levels under 3.5%. No question that this bull move in bonds will go down in the record books as not only the longest, but quite possible the largest move we have ever seen. Granted, the bond market was caught in a long term trading range from 1993 to 1998 and their returns paled in comparison to that of equities, but it remains impressive just the same.

So, what to do now, with the bonds being at or very near their lows for the cycle.
Do nothing for now as the potential for a continuation in eroding stock prices continues to offer them as a safe have to whether the storm.

The only real reason that I make mention of this milestone and the fact that rates could begin to creep back up from here is the fact that it also coincides with a potential intermediate term low in stock prices. Therefore we could very easily see the monies that have sought the safety and liquidity of the bond market begin to make their way back towards equities. This of course will more than likely be a temporary shift, but one that you need to be made aware of just the same. As there are bound to be very violent rallies in stock prices during bear market rallies, this movement will also be felt in the bond market in the opposite direction.

This potential decline in bond prices as equities move higher will provide those who still have a strong allocation to stocks (80% or more) an opportunity to get into safety once the counter trend rally has run its course and bond prices have settled back a bit.

There is a lot going on right now as we see some serious money shifting from different sectors of the markets. With these shifts will come many opportunities including the collapse in oil prices that is not only a possibility, but a question of when and how far.

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