Long Term Trend Analysis

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Relevant
Posts: 505
Joined: Thu Apr 26, 2012 1:01 pm

Long Term Trend Analysis

Post by Relevant »

Interest rates on 30 year Treasuries have risen to near the trend line in the past 5 weeks reaching a high of 37.92 and have since retreated to 36.49. Click on Subject Title to read more!

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I posted the following chart on June 6th under the subject: "Bond Bubble Bursting???"

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While Yearly charts aren't very useful in making near term decisions it is important to know the direction of the long term trend and to be aware of potential turning points in these trends.

Strong uptrends are recognized by a series of higher high points and higher low points while downtrends contain a series of lower highs and lower lows. If this sequence is broken it can indicate that the overall trend is preparing to change direction.

Within the Red circle in the chart above you can see that the low point in 2011 is higher than the low point of 2008. This may be our first indication of a major long term trend reversal. In the past week interest rates began falling again but it will be important to watch the medium and near term pivot points to confirm or discredit a change in direction in the longer term trend.

To view long term charts for the S&P 500 and DAX read my "Global Market Uncertainty" Post at: http://relevantinvestments.com/global-market-uncertainty/

skiehawk11
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Joined: Wed Jan 05, 2011 2:32 pm

Re: Long Term Trend Analysis

Post by skiehawk11 »

Regarding bonds:

Currently, rates are rising. Rates will continue to rise. With the Fed not reducing bond purchases there is no mechanism to reduce rates. However, once bond purchases are reduced, the supply/demand mechanism will increase bond prices which should counter rising interest rates.

Also, it will be interesting to see what happens as rates start increasing. Will investors move towards the higher interest rates to capture gains with "less risk" investments?

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Relevant
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Re: Long Term Trend Analysis

Post by Relevant »

skiehawk11 wrote:Regarding bonds:

Currently, rates are rising. Rates will continue to rise. With the Fed not reducing bond purchases there is no mechanism to reduce rates. However, once bond purchases are reduced, the supply/demand mechanism will increase bond prices which should counter rising interest rates.

Also, it will be interesting to see what happens as rates start increasing. Will investors move towards the higher interest rates to capture gains with "less risk" investments?


In the past 5 trading days interest rates have been falling. (F-Fund rising)

Bond prices move in the opposite direction of interest rates. The imputed yield of a bond is the difference between it's face value and price paid.

If demand for bonds is higher than supply, bond prices go up (Interest rates go down) and vice versa. The Federal Reserve has been artificially creating demand to drive bond prices up and interest rates down. When the Fed curtails purchasing rates will rise and bonds will drop unless new buyers enter the market to replace the demand.

skiehawk11
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Joined: Wed Jan 05, 2011 2:32 pm

Re: Long Term Trend Analysis

Post by skiehawk11 »

I agree to an extent.

However, an argument can be made that if demand remains high and the Fed reduces the amount of bonds available for purchase, then a unchanged level of demand combined by a reduction of available bonds will drive bond prices upwards thereby reducing rates.

Demand should remain high especially if investors start chasing the higher yields. The Fed will most likely artificially limit the amount of bonds available in an effort or in hopes of controlling the rising rates and or keeping the rates at or below a certain level.

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Relevant
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Re: Long Term Trend Analysis

Post by Relevant »

skiehawk11 wrote:I agree to an extent.

However, an argument can be made that if demand remains high and the Fed reduces the amount of bonds available for purchase, then a unchanged level of demand combined by a reduction of available bonds will drive bond prices upwards thereby reducing rates.

Demand should remain high especially if investors start chasing the higher yields. The Fed will most likely artificially limit the amount of bonds available in an effort or in hopes of controlling the rising rates and or keeping the rates at or below a certain level.


Bonds are issued to finance debt - it's not a strategic choice of the Fed. They can't choose to increase or decrease supply. They can only participate in the demand side of the equation. Supply only declines when the national debt declines. Rates rose recently because investors exited the bond market in anticipation of the Feds slow down.

Rate chasing comes into play when investors who own the actual bonds decide to hold them until maturity.

greengrass
Posts: 334
Joined: Fri Jan 11, 2013 9:28 am

Re: Long Term Trend Analysis

Post by greengrass »

Great back and forth discussion, don't see it often enough. Thank you

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