Long time readers know we are not fans of permanent ZIRP and sub-inflation term yields. The dog allows us to dance between the raindrops and Hooper drives the boat. That said, a few points have caught our eye.
The 30 yr future- what we call the Bond Classic - has now completed 4 months of inside price action from the Sept 2011 move. Now , we realize a month is 29 days, 7 hours and 45 minutes longer than 99% of players macro time frames but the contract has been groping toward balance for 120 days.
The 5 year note contract is showing us something completely different. The first corrective dates from Jan 09 to June 2009. A price action of 9 points and a time frame of a whopping 6 months.The 2nd corrective dates from Nov 2010 to March 2011 with 5 months and 6.5 points of movement. The 3rd period of note is from Aug 2011 to Oct 2011 a "rapid" 3 months and roughly 2.5 points.
These movements show the frequency(+) and the amplitude (-) for the 5 year note contract. central Bankers are on their knees hoping they can chain the yield to the floor and smother it into submission. Unfortunately, markets that exhibit these characteristics are indicative of something bigger and nastier. The "something" we are worried about was outlined here, 2 weeks ago (Calling a Top). Put simply, if rates stay here, the bad guys win. The downside is if rates rise they can do it in 2 fashions. One, a modest rise and orderly move to the exit coincides with moderate growth and inflation, rainbows and lolipops. Term structures in areas with better climes and tastier foods exhibit the other, less attractive alternative. Either way, it is important to remember that negative real rates and long durations are good for the borrower not the lender.