Monday saw the markets for pretty much all of the U.S. treasury debt instruments rise after a massive gap higher last week. The headlines keep saying it has to do with the rising stock market but the equity markets have been rallying for months and the ratio of the 30 year bond yield to the S&P 500 index continued to drop and drop heavily. Even when that ratio has risen in the past it has never seen the kind of gap up that we saw to start last week. Does this have to do with Greece and the CDS default trigger? Has the flight out of U.S. treasuries begun, if ever so slightly? If the money isn’t rotating out of bonds and into stocks then where is it going?
Here’s a link to the three year chart and you decide for yourself. If you look at the same chart for the 10 year and 5 year Notes you see the same pattern. The ratio with the 30 year in the past six months has Operation Twist 2 written all over it as the floor fell out of the ratio with the Fed actively attempting to flatten the yield curve. Well looking at the current situation, something has certainly changed and the yield curve is beginning to steepen. The 5 year yield has risen 0.27% since last Monday’s close while the 10 year yield has risen by 0.34%. The 30 year only rose 0.31%, which means the Fed is still in the process of winding down OT2. The 2 year/10 year spread has risen 0.29% to 2.00%.
In all of this is the price of gold which continues to stubbornly hold above the $1650 level and more importantly refuse to approach the 288 EMA, which currently is $1602.77 per ounce.
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