Richard Rhodes

Richard Rhodes

Well, finally the past economic/political week has passed, and we find ourselves starting down the barrel of QE-3. There is no need to go into the particulars of QE-3, but suffice to say that the Fed is buying mortgage-agency debt rather than adding to their Treasury debt holdings. This put downward pressure upon agency debt yields of course, but then it also provided for a rally in both the 10-year note yield as well as the 30-year bond. Our interest lies in rally in the 30-year bond, for it would appear that the long bear market of a decline in yields is "over", which in our mind is a "watershed" event that means higher Treasury rates for the months and years ahead.

If we look at the monthly chart of the 30-year bond ($TYX), then we find previous support at 2.50% has held; we find the distance below the 115-month moving average tested its -40% oversold level and bounced - and we are starting to see the 14-month stochastic turn higher. This all argues for higher bond yields. But what we find more than a passing interest, is that since QE policy moves have come into being since 2008 - each and every announcement always led to higher yields and a test of the 115-month moving average. If that is the case now, then we'll see the 30-year bond move from 3.08% upwards of 4.37% in the months ahead.

30yrbond 9-15-12

Now, we aren't worried about this yet, for market participants will use any rally in bond yields as "fuel" for the stock market. However, the higher the 30-year goes, and the speed at which it gets there - if too fast - then will certainly cause concern at the Fed as well as on Main Street. Higher rates are not what the Fed wants, but at this juncture - it would appear this could be the "unforeseen" consequences of stepping on the QE gas pedal.

Enjoy while it lasts; higher rates are going to be with us for many years into the future.

Good luck and good trading,