Wednesday, March 26, 2014

Treasury bonds reflect global deflationary pressure

....Also worth noting is the latest action in the bond market.  In the Feb. 26 report we discussed buy signal for bonds confirmed by the Coppock Curve indicator for the iShares 20+ Year Treasury Bond ETF (TLT).  

The Coppock Curve is one of the single best indicators for issuing buy signals on bonds (though it is less helpful for determining tops).  The Coppock Curve is derived by adding the 14-month and 11-month rate of changes for bond prices and smoothing the result with a 10-month weighted moving average. 

As I wrote in the Feb. 26 report: “The recent Coppock Curve buy signal for bonds, assuming it pans out, means that Treasury yields will be declining while bond prices rise.  Declining yields are very much consistent with the Kress cycle scenario for 2014, which suggests that disinflationary if not outright deflationary pressures will increase until the long-term cycles bottom later this year.”  

While I don’t expect selling pressure to be very strong against equities until after May, the fact that TLT broke out above an 8-month trading range ceiling on Wednesday is an indication that investors are becoming more concerned about deflation and its effects on global market volatility.

[Excerpted from the Mar. 26 issue of Momentum Strategies Report]