With the Jackson Hole symposium set to begin tomorrow, let’s take a look at the technical state of the U.S. Treasury market. The question remains as to whether Ben Bernanke will begin Quantitative Easing Part 3, and perhaps the bond market can suggest an answer. (I’m focusing here on the Generic 30 Year Treasury yield, as some interesting price movement has occurred.)
The chart to the right shows the yield on the Generic 30 Year Treasury going back to December 31, 2007. The first interesting point is the white line which marked the 2008 low in yield for the 30 year. At the beginning of June, we tested that level – a 2.5% yield – and it held for a few months. Then at the end of July, 2.5% was tested again and failed to hold for three days, as the yield fell to 2.467% on a closing basis.
However, this was a failed breakdown for the yield, as it quickly shot to 3% in a matter of weeks. In doing so, the yield rose back above the 2011 low and the high hit after the first failed test at 2.5% in June (this line is marked in red). Also – and this is not detailed on the chart – there was a bullish divergence established in momentum indicators for the yield between the June and July low, which further confirms the failed breakdown. Therefore, this chart suggests that we’re experiencing a temporary pause and consolidation in the
yield before continuing the advance higher, and a break of 2.5% would be needed for me to reassess this interpretation.
So what does this mean for Jackson Hole? Simply put, it means something bad will happen to the treasury market. Bernanke will either initiate QE3 so traders pour out of bonds and into stocks, or he will refrain from initiating QE3 so $1 trillion in bond purchases fails to materialize. Either way 2.75% for 30 years seems like a bad investment.