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30-year YIELD breaks to yearly low

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The 30-year YIELD has broken below the March 22nd low YIELD of 5.217% today at 5.215% and gives further hint that many market participants are trying to play some defense in their portfolios. I've labeled the 30-year YIELD as the "riskiest" Treasury Bond for a trader/investor to hold in their portfolio as the longer maturity brings with it greater uncertainty considering the time until maturity. Market participants that are buying this bond at current market price are "betting" that the 5.215% YIELD they'll receive each year for the next 30-years will provide a better risk/reward return than other investments currently available.

30-year YIELD Chart -

I've marked three different dates on the above chart of the 30- year YIELD to give us perspective of where YIELD has been in recent months and some historical events that took place during that time. From the previous low YIELD of 5.217% on March 22, 2001 we saw selling in this bond and YIELD rose to a May 5th high of 5.901%. During that time, the S&P 500 rose sharply from the 1,100 level to 1,300 as cash freed up from the sale of these bonds flowed into equities. Then money began rotating back toward this bond as YIELD became more attractive to market participants. To raise cash to buy bonds, many market participants rolled out of equities, taking some trading profits there, and sought out the safety of Treasuries.

In late September, the YIELD on the 30-year rose sharply to the September 21st high, but this selling was instigated by uncertainty in the underlying bond due to terrorist attacks on the east coast. This was something we felt might happen immediately following the terrorist attacks, but didn't feel the higher YIELD during that time would bode well for stocks as the action was due to "fear" and not rotation taking place from bonds into equities. Since the September 21st relative YIELD high, we've seen market participants pour cash back into this bond (perhaps foreign investors coming back to the U.S), but stock rallied as the "fear" of terrorism somewhat subsiding.

One currency we used to our benefit was the Swiss Franc and the December 2001 Swiss Franc futures (sf01z). Immediately following the terrorist attacks, we felt a rising Swiss Franc vs. the US$ would give hint that market participants were in fact rotating some money out of the US and perhaps converting some money toward Swiss Franc. Yesterday and again today, we're seeing a rather precipitous rise in the Swiss Franc futures relative to the US$.

Swiss Franc Futures -

A move above the 0.6226 level would have me growing concerned that the market is once again beginning to worry about things here in the United States related to terrorism. It's interesting that the Swiss Franc futures reached a peak on September 21, the same time the S&P 500 reached a low and the same time the 30-year YIELD dropped from a relative high YIELD of 5.639%. The past two sessions we've started to see a divergence of past pattern. YIELD on the Treasury continues lower, yet Swiss Franc futures go higher. This is DIVERGENCE of the past and perhaps leaves stocks out in the cold.

My thinking is.... if money is going into the 30-year YIELD and going toward Swiss Franc, where in the heck is money perhaps rotating out of? Yes, it could be coming from short-end money markets, but the 13-week YIELD ($IRX.X), which many short-term savings and money market accounts interest rates are based off of is also lower.

In summary, should current action continue with lower YIELD and rising Swiss Franc, I'm thinking stocks could suffer some further downside. YIELDS are once again near a level where we look for some type of reversal higher. I think the "bullish" case would be for a HIGHER YIELD and falling Swiss Franc, but that has yet to happen. However, that doesn't mean we can't look for it and be ready to trade such a scenario.

For now, I'm rather defensive in trading. Watching YIELD and currency for some type of hint for an equity market recovery.

Jeff Bailey
Senior Market Technician
Option Investor

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