US Treasuries – Will 2009 Be Like 2006-2008 Or Like 2003 & 2005?

Editor’s Note: This article is an exercise in journalism and journalism only.  It is intended to describe history and to raise questions about the future. It is definitely NOT an investment article and should not be considered as such. No one should base any investment decisions or consider any investment decisions based on any fact, opinion or analysis in this article or inferred from this article. All Investment decisions should be discussed with your investment advisors and should only be based on your investment needs, objectives, suitability and risk tolerances. 

We have written a number of articles on this blog about US Treasuries – notes and bonds issued by the United States Treasury. These are considered to be absolutely the safest and most liquid securities on earth.  This is why Foreign Central Banks, International Big Money buy huge amounts of US Treasury securities at regular auctions conducted by the US Treasury Department.

Because these are not sexy securities, Financial Media generally laughs at these securities and scoffs at investors who own these ultra safe securities.  The standard refrain is “why should any one lend their money to the US Government at 3.00% a year?”. This question assumes that investors who buy 10-Year Treasuries today would have to hold these securities for 10 years. Yet, no one asks stock investors whether they intend to hold own to their stocks for 10 years without selling.

US Treasuries have a huge advantage over US Corporate Bonds, High-Yield or Junk Bonds and Emerging market Bonds, sexy categories favored by Financial Media. The advantage is that you can sell US Treasuries instantly. In normal markets, you can sell millions of US Treasury securities in a single, quick phone call. Try selling your Corporate, Junk, EM bonds or even Municipal bonds in a single phone call.

US Treasuries are safe as far as credit risk is concerned (you get your money back at maturity, no questions asked). But that does not mean these securities are NOT volatile.  In fact, the longer the maturity of your Treasury Bond, the greater its volatility or its price fluctuation.

It is this volatility that makes 10-30 Year Treasuries interesting and aggressive vehicles for trading. In fact, 30-Year US Treasuries have given investors far greater returns than US stocks since 1982, when the bull market in stocks and bonds began (see our article “Are CNBC Anchors on a Mission Against US Treasuries? – A Viewer’s Perspectives” – August 23, 2008 ––a-viewers-perpsectives.aspx   ).

History shows that investors who buy long maturity US Treasuries after a steep sell-off can generate sizable returns in a few months. The question, of course, is when to buy and when to sell? Clearly we do not know the answer. But, we can share with our readers interesting trading patterns that many people know but few talk about.

Since 2003, the month of June has been the pivotal month for long maturity US Treasuries. In every June since 2003, these securities either reached their top prices (making these great sells or shorts) or traded at their lowest prices of the year (making these great buys).

TLT is the symbol of the 20-Year Treasury ETF. Below is the chart of TLT since its introduction in 2002.

As you can see, in 2003 and 2005, TLT ratcheted upwards from late April to June and reached its top price in the month of June. You could have sold your positions at that time or put on a highly profitable short position.

On the other hand, in 2004 and from 2006-2008,  the price behavior was diametrically opposite. During these years,  TLT suffered a very steep and sustained sell-off from late April to mid June. You could have bought TLT (or actual US Treasury Bonds) at that time and made very substantial returns in a few months.

Why has June become such a pivotal month? We do not know. It does not have much to do with the direction of the economy, inflation or the stock market (CNBC Anchors take heed). Check it out. The years 2003-2007 were strong recovery years for the stock market and the economy. Yet, US Treasuries/TLT behaved differently from June onwards during these years. Inflation was low in 2003 & 2004, moderate in 2005 & 2008, and relatively high in 2006 & 2007. But, US Treasuries behaved differently from June onwards during these years.

Why do we write this article today? Because as of Friday, April 24, 2009, TLT sits right on (or just below) its 200-day moving average, an important support level. This is usually a big deal because:

  • TLT can bounce up from this “support level” and provide a bullish signal OR
  • TLT can trade down through this “support” level and provide a bearish signal.
Needless to say, that TLT could simply continue to trade within a range and consolidate as it has done since March, 2009.

But, if 2009 turns out to be a year like the past 6 years, Treasury investors could be in for a rocky and exciting ride during the next couple of months.

However, let us be clear.  History does NOT have to repeat. Now that simpleton blog writers like us have disclosed the June pivot in print, markets could mock us by making June a tame month without any predictive power. We do believe in the old adages that Trading Gods are unkind by nature and that markets behave in a manner that makes most investors look foolish.

In addition, 2009 differs from the past seven years in a very critical way. This year, the US Federal Reserve is engaged in buying US Treasury Securities in large size. This adds a totally new, large, non-investment buyer to the market mix. 

Will this new and crucial factor change the behavior of the Treasury Market in 2009 or will June 2009 again prove to be a pivotal month? We will all find out together. 

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