Sep 01 2007
Seems that bonds have bottomed
According to Vanguard, various sectors get hot and cold and it’s always hard to tell which sectors will be hot and which ones will be cold. However, each sector has had at its good times and its bad times over the last 10 years.
One thing you’ll notice from the table above is that bonds were dead last in 2003-2006.
Looking at a 3-year chart of the 5-Year US Treasury Note Price, it seems that a double bottom has formed. Each candlestick in this chart represents 1 week.
The 5-Year Note seems to be seeing stiff resistance at the 106.5 level. I see two scenarios in the next 12 months:
1. The 5-Year Note remains range bound between 102.9 and 106.5 and then drops below 102.5.
2. The 5-Year Note convincingly breaks 106.5 now and heads higher, or remains range bound between 102.9 and 106.5 and then convincingly breaks 106.5 and heads higher.
If scenario #2 is plays out, I would expect the 5-Year Note to hit 110.1 because that is the price target determined by the height of the rectangle formation. 106.5 – 102.9 = 3.6. 106.5 + 3.6 = 110.1. On a short term timeframe, it wouldn’t be a bad idea to dump bonds. However, on a longer timeframe, given that bonds have sucked the last 4 years and that the 5-Year Note seems to have put in a double bottom, I feel it is unlikely that bonds will continue to suck at the same rate in the coming years.
Don’t forget that for bonds your total gain is your capital gain + the income that you get from the bond. That is, if the bond value falls but the income that you get from the bond equals what you lost on the value of the bond, then you break even. This chart is a chart of only the price of the bond. Also note that the bond is constantly changing in this chart because what is being plotted is always a 5-Year Note. A 5-Year Note 3 years ago is now a 2-Year Note. However, if you own a treasury bond fund that always keeps a constant average maturity of say 5 years, then it will closely track the 5-Year Note.
One more thing…
Looking at the table above, is it any surprise I have piled my retirement money into bonds and piled my brokerage money into double shorting the Russell 2000? It did that before I found this table.
[...] Last week I blogged that even though the 5-Year Note Price finished the week above the crucial 106.5 level, I did not feel that the 106.5 level had been convincingly broken. I was slightly worried that it was a headfake. [...]