Monday, April 18, 2011

Treasury Tuesdays

Before moving into this week's Treasury market analysis, I wanted to make a note of long-term levels on the IEFs and TLTs. The general feeling about both of these markets is they are going to eventually start moving lower as inflation fears kick into higher gear and the Treasury gets out of the QEII business.

On the 4 year IEF chart, prices are near important resistance levels, with the first at 92 and the second at 90 -- a few points below current levels.

On the TLTs there are a few more areas of support to move through before we start to see prices moving significantly lower. The lowest of these levels is about 8-10 points below current prices, but that line is fairly weak as it was established by two low points a few years ago. The support lines established by more recent prices are a bit more salient to the current situation.

Last week I wrote the following about the Treasury market:

Going forward, I would expect Treasuries to retest the 200 day EMA, perhaps move a touch higher, but then resume their downward trend. The Fed is getting out of the market and the economic numbers on balance are indicating the recovery is self-sustaining (although possibly slowing down). In addition, we have heard more hawkishness from the Fed of late.

... I expect the Treasury market to continue moving lower for the following reasons.

1.) Fed hawkishness
2.) Inflation concerns
3.) The end of QEII

Let's take a look at the chart, analyzing the IEFs and TLTs in tandem.

Both markets rallied last week, largely by catching a safety bid caused by the EU situation. The US fiscal situation is the least worst kid on the block. The IEFs have risen above the 200 day EMA on increasing volume. However, the EMAs are in a tight range are are offering little directional help. The TLTs also rose on rising volume but are currently hemmed in by the 200 day EMA. Yesterday -- despite the threat of an S&P downgrade -- the Treasury market still rallied because of a worse situation in Europe.

So -- what's ahead for the Treasury market? First, note that IEF prices are above the 200 day EMA and the TLTs are right at the level. In addition, consider these charts:

Both ETFs are in a pretty tight range after falling from highs -- the IEFs from their highest level in the last 7 years and the TLTs from their second highest level. Underlying the current trade is a simple pause as traders "catch their breath" from the recent downward price action.

I'm treating the current action as a consolidation range and would wait to make a trading move until after prices convincingly choose a direction. For the IEFs, that would be a move above 94-94.5 or a move below 92. For the TLTs, it would be a move above 93.5 or a move below 90.

However, it's interesting that despite the current US problems (inflation concerns, budget issues, massive debt), Treasuries are still seen as a safe have trade.