Would Chuck Daly Ask Us to Sell Long Maturity Treasuries?

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 NOT intended to provide any investment advice of any type whatsoever. 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. 

Chuck Daly was the Championship Coach of the Detroit Pistons basketball team and the Coach of the World Champion American Dream Team at the 1992 Summer Olympics. As fans of the Kareem-Magic Lakers, we usually rooted against the Pistons. But we respected Mr. Daly for his smarts, his knowledge and for his professionalism. His favorite dictum was “keep running a winning play until they figure out how to stop it“.

We thought of the late Coach Daly on Friday afternoon, the day the Dow tumbled by over 300 points and the 30-Year Treasury rallied by over 2%. This is after all the month of June, the pivotal month of the year for US Treasuries.

Look at the track record for June. From 2003 to 2009, the month of June reversed the price trend for long maturity Treasuries. Look at the chart below of TLT, the 20-Year Treasury ETF:


  • In 2004 and from 2006 to 2009, the price of Treasuries fell from April to June and the month of June presented a significant opportunity to buy long maturity Treasuries (see the green annotations in the above map).
  • But in 2003 & in 2005, Treasuries rallied from April to June and the highs in June proved to be a significant opportunity to sell long maturity Treasuries (see the red annotations in the above map).

This simple play has been a winner for the past 7 consecutive years. If Treasuries rally strongly into June, sell’em in June and if the Treasuries sell off ferociously into June, buy’em in June.

This year, perhaps due to the problems in Europe, long maturity Treasuries have enjoyed a substantial rally into the first week of June. Will the pattern of the last 7 years continue this year? Will this Treasury rally also prove to be a selling opportunity? No one knows. Should investors follow the Chuck Daly dictum? That depends on each individual. After all, every Chuck Daly play eventually was figured out and stopped by the opposition. Perhaps 2010 is the year the above simple strategy stops working.

We do not mean to trivialize investment decisions. In our opinion, pattern recognition is one way to think about investment tactics.
But what about fundamentals? This year seems to be driven by serious problems in the world. Europe seems to have become a basket case of governments loaded up to the gills in Debt. The Euro currency is hitting new lows vs. the US Dollar virtually every week. It appears that the European economies will suffer an extended slowdown from austerity measures imposed to curtail their debt spending. 

This week the US economy delivered a very unpleasant surprise in the May jobs report. With a tepid US economy and Europe facing a serious economic downturn, forget any concerns about inflation. The specter of deflation is now upon us or so say the experts on Financial Television.

These conditions seem ideal for long maturity US Treasuries and that may be the reason for the ferocious Treasury rally we have seen. The 10-Year Treasury yield has collapsed from almost 4% in April to almost 3% in late May. That is a huge drop in rates and a massive rally in Treasury prices. 

But how much of this deflation scare, how much of the weak fundamentals of Europe are already priced into the current levels of Treasuries? No one really knows. But in the past two weeks, we have seen a seachange in the coverage of US Treasuries at our favorite CNBC. On Monday May 24, CNBC Closing Bell did a bullish segment on Zero-Coupon Treasuries, the most aggressive Treasury Bond vehicle there is. Then on Thursday June 4, CNBC Fast Money highlighted an aggressive bullish options trade on TLT, the 20-Year Treasury ETF. As we said, this is a seachange in attitude. Is this also an indication that the positives about Treasuries are now in the markets?

Then you have the interesting one-year chart below of TLT:

Notice how the May rally in TLT went up to the previous price high reached in October 2009 and reversed back. The big rally on Friday, June 4 stopped well short of the horizontal red line (our annotation). Despite all the bad news from Europe, America and China, TLT has not broken thru this red line so far. 

We recall that the 30-Year Treasury Bond touched a low yield of 3.90%-3.95% in October 2009. This is the level to which  the yield of the 30-Year Treasury Bond traded in the panicky pre-market period on Tuesday, May 25. But it could not pierce thru this 3.90%-3.95% level to the downside. Is this what technicians call a Double Top? The next few weeks might tell the tale.  

So here we are. The Chuck Daly dictum and a potential double top seem to suggest one alternative while the fundamentals of the American & European Economies, the perilous condition of the Euro, the fear of Deflation & the prospect of continued Contagion in Financial Markets seem to suggest the other alternative. 

This may be why some call investing the Greatest Game in the World.

Editor’s PS: We wrote a similar article on April 25, 2009 titled US Treasuries – Will 2009 Be Like 2006-2008 Or Like 2003?

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