US 30 Year Bonds


There is no doubt that the story for 2015 will be volatility. We are two full trading weeks into the year and we have:

1) Oil hitting new lows near $45,

2) The Swiss National Bank removing the Swiss Franc peg to the Euro,

3) $USB 30 Year Treasury bonds hitting new all time highs, eclipsing the 2012 high.

We should probably be wary of Central Banks from this point on.

The US bond market could be an important market to watch this year. It warrants a hard look at the long term picture for US interest rates. There is some evidence that a 60 year cycle exists for interest rates, this being on a peak to peak or trough to trough basis.

Interest Rates  1790 to present

Above is a 200 year chart of 10 year US interest rates. Alternating lows and highs from 1861 to 1981 have averaged roughly 30 years. The trough in 2012 for 30 year long bond rates (2.45) was in the time band for this current cycle to reverse. However, we’ve exceeded that low this month (2.35). There have been periods where interest rates remain low for extended periods (late 19th century) and we appear to be in one now. Looking at 200 years of history, it appears that only a major war of some kind would reverse the 30 year cycle and long term trend in US interest rates. Otherwise rates could linger at these lows for some time to come.

A Sentient analysis of 30 YR USB suggests that bond cycles run longer than nominal US stock cycles. I’ve worked this analysis and massaged it by using a start point in 1983. The reason is that I think the 1984 low for $USB was a failed final or 5th wave down (Elliott Wave speak), and should have actually been the start of the long rise in US bonds. By doing this, ST gives a nice result for 20 month, 60 month and 10 year cycle periods, which I believe apply to $USB. This was then used as the nominal model when running Sentient analysis for $USB. Here is a trough analysis using the 1984 low as the start point. If Sentient starts with the 1981 low, it produces a completely different output. Notice how the 10 year FLD has supported price from the 1980 lows. Also note that I have not pinned any lows.

USB 30 YR Futures Monthly Troughs

Here is a look at a peaks analysis using the same strategy. However because of the trend change in the early 80s, Sentient has a difficult time picking out the appropriate peaks. In this case I started the analysis in 1992.  I could go into some length as to why I believe these peaks are appropriate, but I will leave that for future comments.

USB 30 YR Futures Monthly Peaks

If you can be convinced of this phasing, the issue at hand now is the new high in $USB and new all-time low in respective yield. At some point something has to give, and when it does we will see a major trend change. So why is this important and when is it likely to occur. I’m speculating at this point, but I believe the only thing that can bring down US equity markets materially, is a major reversal in US interest rates and the US dollar. The reason this would happen would be due to a reversal in money flows, since everything has been flowing to the $USD, $USB, select US equities and US stock indices for some time. So, IF this were to happen, that leaves the question of when.

USB 30 YR Futures Weekly

A closer view of the $USB on a weekly chart shows an apparent 10 year low formed at the end of 2013. I wish I had understood its significance then as a long bond investor. The rise out of this low is likely both a 10 year and 30 year cycle magnitude. The equivalent of that cycle low was 1984 where $USB rose for 22 straight months. Other 10 year lows in the past 30+ years only produced rallies of 11 to 13 months (before falling into respective 20 month troughs), thus why I place significance to the 1984 low.

The more conflicting view is from a peaks analysis. Here is a chart spanning 12 years.

USB 30 YR Futures Monthly  12 yr Span Peaks

With new highs this year, have we started a new 10 year cycle for $USB? We’ll only know that the $USB has reversed for good when the Dec. 2013 low is taken out, or the 10 year FLD.

If the world does not enter into a prolonged deflationary spiral, I would suggest that once this current rally for the $USB peaks, likely this year, it will be the trend change in US Treasuries everyone has been looking for. Some see it in March which would be a continued rally of 14 months and likely the minimum time for the $USB to rally before peaking out. However it could rally on continued market volatility into later this year. If $USB held up until Q3 2015 or later, I’m not convinced that we would see major sell signals for US stock market indices before then. Time will tell of course.

I look forward to hearing your thoughts and comments. 2015 promises to be an interesting year.

cheers,

john

 


About SilentOne

I am a retired Chemical Engineer. I became a house dad back in 2000 and then devoted all my free time to the markets. After years of technical analysis study I decided upon Hurst cycles, which has been my primary method since 2007.

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