Investment Cycle by John Paulson

This interesting piece was published and insightfully commented by ZERO HEDGE.

Here a link:

http://www.zerohedge.com/article/exclusive-paulson-portfolio-post-mortem-which-we-learn-maestro-himself-advising-jp-future-go

Japanese Government Bonds near their 20-year High

Japan 5-year CDS is making Higher Highs/Lows.

JGBs are drawing investors attention recently as they are close to 145 which was their 2003 High price. Monthly RSI is not even in Overbought condition so timing of a Short sell would be of a great importance since this market has been ranging for a full decade with no meaningful correction.

Kyle Bass from Hayman Advisors made a pile of money in the sub-prime crisis and he is now on the wires for his Short JGB position:

http://www.marketfolly.com/2010/08/kyle-bass-betting-against-japanese.html

While deflationary pressure is building and everybody is starting again the bond bubble talk I'm pleased to observe a high momentum trend in bond prices and I believe it will be a nice educational experience to see how high it can go until it finally breaks. Then when inflationary cycle begins we will be ready to start building an equities allocation.

US Treasuries 2y/10y Spread Flattening

The 2y/10y Spread has possibly reached a reversal point in its flattening move.

Interesting to watch are the 10-Year bond price to S&P correlation which might indicate more economic hardship ahead and equity weakness. The same is indicated by the 10-Year yield to the S&P.

Yield Curve Flattening - Bear Market looming

yield Curve Flattening has straight Bearish market implications.

It usually points to impending economic contraction and deflationary pressure - simply said Quantitative Easing 2.0 is coming.

Spain CDS is creeping up...

European sovereign credit is experiencing escalating problems.

Japanese Government Bonds - How high?

Monthly JGBs prices chart shows we are back to the 1998 highs.

So 12 years of deflation and low interest rates and we are right at the same spot. However with the increasing Sovereign Debt risks (PIGS) and the high ratio of government borrowing in Japan how high can JGBs go before bond vigilantes take matters in their hands?

I see USTs are going higher and yields down but in the case of the rising Sov debt risk shouldn't we be seeing bond selloff as investors should demand better yield to compensate them for the default risk?

30y T-Bond breaks Key Resistance at 120. Yield curve is steepening.

30 Year T-Bond broke the Key Resistance level at 120.

That's called Flight to quality.

Weekly chart of the 2Y/10Y Yield Spread shows a mid-term Steepening inside the Long-term Flattening trend channel. Anyway it's a sign of Inflationary pressure in the near future.

The Yield curve is clearly steepening.

Markets falling towards Complacency?

VIX falls near its recent low and is nearing the 15 level which marks the Complacency entry mark..

Given the lows around 9 - 10 in 2007 where market was roaring in the 'Good times' it turns that market has remained most of the last 8 months in a state of relative balance and is going into an even more relaxed state.

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S&P 500 is holding nice gains after it corrected 9% in January.

The major index is trading in an Rising Wedge pattern and current target is around the key 1200 level which is in confluence with the 200-Week MA at 1227.

Both RSI and MACD are turning up supporting the move and the 50-Week MA is tracking nicely the Uptrend. This a great educational experience to have 1 straight year of roaring trend while we incessantly hear of a new crash, crisis, depression... Trade the trend!

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USD index is playing the indecision game for 4-th week right on the 200-Week MA at 80.39.

The technical picture shows that DX is trading inside a clear Uptrend Channel. However in the present moment it is a range play capped by the long term important 81.40/50 level and downside is holding around the 79.50 (Trendline Support) and 79.17 (50-Week MA).

Since the last Weekly settlement was at 80.46 I'd suppose a test of the Support layers in the 79-80 region (which might translate into EUR/USD test of 1.3750-1.38 levels) before DX tests the upside.

US Treasury Bonds Selloff - follow-up call

I was calling a UST bonds selloff 2 weeks ago

I'm happy I made that call right on top of the market and it did selloff after it. I didn't have position so it is only an intellectual satisfaction with my analysis.

After yesterday FED raised the Fed borrowing window to 0.75 bp it makes sense to think on the aggregate intelligence of the market - seems markets were anticipating that move so they started creeping higher 2 weeks prior to the actual news was released.

2 / 10-year bond spreads are signalling a possible steepening which is bullish for the economy.

While on dailies the moves are pretty rangy the Weeklies have strong signals on technical indicators as well as inside the trending channel that the spreads is moving toward steepening.

10-year UST Note yiled bounced off the 3.60% support and is moving higher with first target/resistance around 3.85/89.

10-year UST Note has an immediate target around 116.90 with further focus on 116.50.

10-Year US Treasury Notes - Sell!

UST 2/10 Year bond spreads are further flattening which usually has bearish implications for the economy.

10-Year Yields are at an important Resistance turned Support above 3.60%.

Trend is supported by the 50-DMA, however the reversal pattern suggests further downside is possible.

10-Year UST Notes are a Sell now that they hit the central balance point of the last 2 swings.

Trading below the 50 & 200-DMAs with falling RSI and MACD about to give bearish crossover Notes are a sell until we see a close above 118.

10-Year yields bounced off the former Resistance turned Support at 3.60 and are heading for the recent 3.85 highs.

Bond Spreads - flattening doens bode well for economic recovery

Weekly chart show bond yields are trading in ranges. While it's easily visible in the 2-Year UST Bills - the 10-Year Notes are still trading inside 3.20 - 3.85 area.

10-Year Notes however in my opinion are trending higher as we now have covered the December 2009 Gap and holding above the 40-Week MA. Historical charts show evidence that since the high inflation times of the '80-ies and Paul Volcker Bond prices are still in their historical high end range and if markets are indeed mean reverting in their nature Yields are going to go up further. The timing of the exit strategy by the Fed that will signal the tightening phase is impossible for me to suggest.

The 2Y/10Y Bond Spread Steepener trade in December 2009 has fully reversed its course into Flattening one since start of 2010. When we look at the Weekly chart of the Spread we can observe the trend channel and its a flattening one and this seems to bode ill for the economic recovery that we witnessed in the latest US GDP release.

Yield curve implications to FX trading

2 month inverted 10Yr-2Yr US treasury Notes Spread to EUR/USD direction shows it provided a divergence signal.

Buying the long end of the US yield curve on the assumption of positive economic growth translated into higher USD demand.

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The whole last 9 months we were in the tight SPX - EUR/USD correlation which was basically a risk taking/aversion trade.

Last 3 weeks since the USD reversed its trend we see the 10Yr-2Yr US treasury Notes Spread widening further and a sharp appreciation of the USD.

Here is a 1 year data 10-2 yr spread has been rising steadily along with the EUR/USD. Seems 3 weeks ago something happened as the EUR/USD trend has bent and spread is still moving higher. on this time frame we can make the 3 possible assumptions:

1. EUR/USD is leading and spread will tighten due to buying of the long end - which will mean deflation/economic problems/.

2. EUR/USD will again converge to the observed trend and is actually trading here at a huge discount.

3. This assumption is that the correlation is broken and USD will be bid on positive US economic prospects and the risk trading theme since March will be removed and give way to fundamental flows into US stock market as inflation fears will emerge and higher performance will be demanded.

US Treasury Yields are breaking higher

Last week I was calling for reversal in US Treasury Price and Yield.

Both Price and Yield of the 10-Year US Treasury Notes reversed their intermediate trends right at the 50-Week MAs.

As seen on the chart both are inside trend channels and bounced off the Trendlines and the prevailing scenario is they will break in the direction of the Longer term trend.

Yields closed last week at 3.55 High. There is Resistance levels confluence around 3.60 -3.75 and the break of that area will set target at the 200-Week MA at 4.08.

Bond prices reversed and closed for 2-nd week below the reversing 50-Week MA and bounced off the Trend channel top to lead its way into the projected 117 channel bottom. Breaking that support leads us at the Support confluence of Long term 114.50 Resistance/Support; the June - July Lows and also the 200-Week MA coming at 113.12 right now.

ADX trend strength has been at its lowest levels in the last 3 years and that would suggest we might be right before a trend acceleration once the course has been set. The recent USD appreciation along with latest positive US economic data signals a change in recent correlations and a turn back into more classic relationship: buying the currency of those going out of the recession first.

10-Year US Treasury Price & Yield - Possible setting for reversal

The NFP data on Friday caused a sharp turnaround in 10-Year UST's price and yield right at the 50-Week MA levels. The positive media signals about the exit from the recession seems to converge right now with the sharp upsurge in 10-year yiled to 3.48 however as seen on the chart it is still caught in the 3.25 - 3.66 range. My take is we have seen a solid support which survived a second test this week at 3.22 and yield is going to challenge 3.66-70 levels where I'd expect to see some struggle at the consolidation channel top.

The Weekly candle shaped as a huge White Marubozu which is also a Bullish Engulfing pattern, closing the gap from 2 weeks ago. The whole structure of this consolidation might well be called a Bullish Flag that implies, if broken to the upside around 3.73, a continuation with first target - the 200-Week MA at 4.09.

The 10-Year note's price in he same time has he same technical workings in the moment as it bounced off the Resistance trendline at 121.17 and closed the gap from the 2 weeks before. I'm looking for continuation of this move down below 118 where the longer term trendline from the Dec '08 Highs and the Support Trendline converge around 117.

10-Year US Treasury Note on the Rise - Critical Resistance at 120.17/38

10-y US Treasury Note - Weekly chart: Price is close to probing the Upper Bollinger band at 120.17. Next important Resistanc ecomes in 120.38 - the 55-Week MA.

Price consolidates with upward bias inside a rough range between 117 - 120. I'm looking at the ATR indicator for further implications of change in Volatility. There is a solid trend of range contraction and we are on the level of the Average True Range we have seen in March and September 2008. Mu take on this picture is that ranges if falling below the current 1.66 range that would most likely signal trend continuation. 55-Week MA is acting as fulcrum axis pointing the trend. Given the convergence is pivotal 55-WMA and the Upper Bollinger Band around 120.17/38 my opinion is that we might see a further advance and expansion of the BBands which would fit in the trend breakout scenario.

The Dec '08 -> March '09 Highs Trendline has already been broken the Week before and last weeks higher high is acting as confirmation to this setup. RSI is supporting the upward momentum.

Japanese Governemnt Bonds - Yen Debt Bubble?

Here is a Monthly chart of the JGB performance.

Barron's magazine ran a story this week, which made the case the Japanese economy is a ticking debt time bomb (maybe the leader of a pack of time bombs across the industrialized world). Total population in Japan is falling fast, and falling even faster is the working age population to support Japan's massive debt to GDP ratio, measured officially at around 217%, that compares to 81.2% for the US and an average of 72.5% for the G-20 nations, according to Barron's. (blackswantrading.com/)

Interesting to me is how is it possible to maintain a debt to GBP ratio over 200% and still manage to market your massive debt. the chart shows that JGBs are in the 128 - 142 range for the last 10 years and still remain strong with all time low yields..

TLT (iShares Barclays 20+ Year Treasury Bond Fund) - Bond rally in progress

Weekly chart indicates we had a significant Reversal in the Bond market trend accompanied with a record volume and a Hammer candle pattern.

The support came at the 144-Week MA which already held 3 tests as evident from the chart.

For the time being TLT Bond Fund is trading in the 90 - 89 range and in the coming week will test the immediate Resistance of the Trendline from the December 2009 Highs. next test is the 97-98 level defined by Sept '08 Hihgs and the 55-Week MA. This week Treasury auctions had good results and participation thought there were different interpertations of the 'Indirect' participants true identity.

LIBOR - 20-Year Historical Chart

The hitorical perspective shows we are at the lower end of the credit cycle though there is some more space to the downside if we trust the technical channel. This is however doubtful since the last top didn't touch the upper channel either. If history could be any guide I would take the big difference in the different LIBOR maturities as a potential sign of a turning point like it is seen around 1984 peak.