First, it's important to note where we are in the bigger market cycle. Starting in mid-2007 when the financial sector really started to bleed, treasuries became a very popular investment. Notice the IEFs started to rally in mid-2007 until early 2008, then sold-off, then rose again at the end of last year. All of this was the result of the credit crunch. Simply put, investors started looking for safety and this is where they found it. Also notice the sell-off of the last few months has put prices near the middle of their 2008 trading range -- which occurred because of fear.
In last week's update, I speculated that the increased volume over the last few week's may be a selling climax and therefore the market may be rebounding. Higher volume is agood indicator of that, as is an extended more in one direction along with yields nearing 4%. Notice that prices appear to be forming a bottom -- or at least are leveling off before a further move lower (we won't know until prices move in one direction or the other).
There are some incredibly strong cross-currents in the Treasury market right now. On the down side we have a ton of issuance coming to market. There is also an inflation scare (which I believe is bunk). However, high yields during a low inflaiton environment is very attractive which is why I thought the 4% yield mark was very important.
