Once quantitative easing ends the biggest buyer of longer-term U.S. Treasuries and mortgage-backed securities, the Open Market Trading Desk of the Federal Reserve Bank of New York, will no longer be purchasing these securities.
On June 18, the Federal open Market Committee (FOMC) instructed the trading desk to reduce the pace of MBS purchases to $15 billion per month and U.S. Treasuries purchases to $20 billion per month. Once this is done, longer-term yields will likely be higher than they are today.
Courtesy of MetaStock XenithThe weekly chart for the yield on the 10-year note (2.521%) is showing divergences to look for when predicting that the decline in the yield is over and that the trend toward rising yields has begun. The 12x3x3 weekly slow stochastic reading ended June at 41.32 after touching the 20.00 reading at the end of May. The green line is the 200-week simple moving average, at 2.390%, which has prevented lower yields since the end of October. The 10-year yield needs to sustain a trend above its five-week modified moving average at 2.572% to solidify the trend toward higher yields that began nearly two years ago. Looking back to 2007, the yield on the 10-year note was as high as 5.333% in mid-June, a full six months before the Great Recession began. The cycle low for the 10-year yield was 1.381% set on July 25, 2012. That was quite a bond market rally. Back in mid-June 2007, the iShares 20+ Year Treasury Bond ETF (TLT) ($113.24) traded as low as $82.20. The high in July 2012 was $132.21 for a gain of about 60%. Over the same time frame the SPDR S&P 500 ETF (SPY) ($195.82) traded as low as $149.55 in mid-June 2007 and the high in July 2012 was $139.07 for a loss of 7%. Since July 2012 the S&P SPDR is up about 40% with the iShares bond ETF down about 14%. At the time of publication the author held no positions in any of the stocks mentioned. Follow @Suttmeier This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff
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