Maybe it was just a situation where the markets easily made major moves in very thin markets. Nevertheless, last week the Dow Jones Industrial Average took center stage, roaring 6% higher despite very bad news on the economic front. Is all the bad news in the stock market? Bonds took their cue from stocks, and fell sharply (down six handles in two trading days to finish at 135 15/32).
In its front page article, Barron’s says that “Treasuries offer little or no margin of safety if the economy unexpectedly strengthens in 2009, or the dollar weakens significantly, or inflation shows signs of reaccelerating. Yields on 30-year Treasuries easily could top 4% by year end... The chief risk to the Treasury market stems from the potentially inflationary impact of both the Federal Reserve's super-accommodative monetary policy, which has dropped short rates close to zero, and the enormous looming fiscal stimulus from the federal government. It also may take higher yields to attract investors — particularly foreigners — as the Treasury seeks to fund an estimated deficit of $1 trillion or more in the coming year.”
However, a lower bond market is not a sure thing. Supportive factors include a U.S. economy that will probably get worse before it gets better, and a Federal Reserve that says it may buy long term Treasuries. What does history suggest will happen?
Q: What has happened in the past when, in a week that the Dow Jones Industrial Average gains more than 5%, Treasury Bonds fall by more than two points?
A: Treasury bonds have actually rallied, implying lower long term rates. 30-year bond futures have risen 63% to 100% of the time, one to four weeks later. Short term rates have also tended to ease, as Eurodollar futures have gained 75% to 100% of the time, during the same time frame.
According to the seven previous occurrences of this event, EventEdge indicates that CBOT 30-year bond futures have shown a strong bullish edge that peaks 10 trading days after the event. Thus, the projected date for the peak of the bullish edge relative to the current event date (Friday, Jan. 2, 2009) is Friday, Jan. 16, 2009. Bonds rally in 100% of the cases (7 of 7) by an average of 1.7% relative to the close on the event date. The overall return of the seven cases is 1.7%, which, based on the close of CBT.US on the event date (135-30), provides a target price of 137-49.
But it is well to note that the very next day after the event, bond futures have declined in 5 of the 7 cases (71%) by an average of 0.6%. The two rallies gained an average of 0.4% and the overall average return the next day is -0.3%.
For more Market History go to www.markethistory.com
Robert J. O'Brien Jr. is President of County Cork, LLC, a Commodity Trading Advisor (CTA) based in Skokie, Illinois.
