Bond, (zt Murphy)

MORE SUPPLY ISN'T GOOD FOR BONDS... One of the side-effects of the massive government bailout plan is that it is going to have to sell a lot of bonds to raise that money. That means the supply of Treasury bonds is going to increase. When the supply of any product increases, its price usually falls. That reality may explain why Treasury bond prices have fallen so hard over the past week. There are technical factors at work as well. Chart 1 shows the 7-10 Year Treasury Bond ETF (IEF) tumbling over the past week in heavy trading. Part of the reason for Friday's bond slide may have been some switching out of bonds into rising stocks. But there may be more at stake here. Bond prices may be putting in an important top. Chart 1 also shows that the September bond peak failed at its March high. That raises the possiblity of a "double top" in the making.
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LONGER TERM RESISTANCE... Chart 2 shows another reason why the recent setback in bond prices is so important. The monthly bars show the price of the 10-Year Treasury Note (UST) also backing off its previous peak formed in mid-2003. That makes that a potential major resistance barrier and increases the likelihood that bond prices could be forming a major top. Whether or not that turns out to be good for stocks remains to be seen. In recent years, bond and stock prices have usually trended in opposite directions. Money moving out of bonds has usually moved into stocks. The bigger question is whether or not the stock market can prosper in a climate of falling bond prices and rising bond yields.