Bond Update – Staying with Short Maturies, October 10, 2009

My long-term bonds strategy includes determining when to go long on bonds relative to the 10-year and 2-year bonds and when to shorten maturities. I have attached a few long-term charts with my current E-wave counts showing why I now am placing any new money in 1-year bonds or shorter.

Monthly Trend of 2 Year Bond

Monthly Trend of 2 Year Bond

The first chart of the 2-year bond (continuous contract) shows that my labelling of a 20-year upward move is just about over. Not only is the wave structure near completion, but momentum is waivering and I am very close to getting a sell signal. In the past, these signals have been withing months of a top in the 2-year that lasted for a minimum of 16 months and as long as 33 months. The implication here – I believe short-term rates will begin rising relatively soon…within 6 months, assuming that a sell signal develops this month or next.

Monthly Trend of 10 Year Bond

Monthly Trend of 10 Year Bond

The second chart shows the 10-year bond. Interestingly, the 10-year seems a little further away from a sell signal, but momentum has already declined and my 10-year signal can be up to 6-months after the ultimate top…it is designed to not whipsaw in long-trending markets. Even though my wave count allows for one more top in the 10-year, it is quite possible that the top was made on 12/13/2008. The next 6-months will tell.

In either scenario it means that I see rates going up, which makes perfect sense given the enormous federal borrowing. Therefore, as bonds rollover and need reinvesting, I will be keeping maturities short…under a year. This will likely continue for more than a year as I await the next buy signal in bonds. Of course, I am speculating since a sell signal has not been issued. I believe it is best to be cautious with my rollovers as they come due.