Archive for August, 2010

10-Year U.S. Treasury Yields Likely To Decline Further

Posted in 10-Year Treasury Note (TNX) on August 16th, 2010 by admin – Be the first to comment

Jim Donnelly, Olson Global Markets

Following a week’s worth of evidence that the economic recovery is sputtering, another leg of the “run-to-safety” shift into U.S. Treasury fixed income securities ensued. A spate of better-than-expected 2nd quarter earnings results took a back seat to a number of troublesome reports.

Initially, The Federal Open Market Committee announced that it would reinvest maturing mortgage-backed securities back into the government debt so that its balance sheet would not shrink. This was seen as a signal that economic activity in the U.S. was losing steam. Then, Cisco System’s Chief Executive John Chambers warned that he was seeing “mixed signals” and an “unusual uncertainty” following lower than expected first quarter sales. Adding to Wall Street jitters was an unexpected rise in weekly initial jobless claims to 484,000, the largest jump since February. Disappointing industrial production numbers in the euro zone worried investors’ confidence further. As a result, U.S Treasury 10-year notes ended the week at a yield of 2.688%, the lowest seen since March 2009.

Technically, the yield on 10-year Treasuries continues to decline within a downwardly sloped “trading channel” that has been in place since 1993. Although, weekly stochastic measures are falling rapidly, they are not yet in an oversold condition on weekly charts. Thus, an opportunity for 10-year yields to test key “cross” trend line support (resistance in terms of price) currently at the $2.40% level is possible.

If the 2.40% yield area fails to hold, however, it is worth noting that “channel bottom” support for 10-year U.S. Treasury yields now sits at $1.72%. Conversely, that would represent key resistance when thinking in terms of 10-year note prices. For this area to be tested, however, an extended period of worrisome news would likely be needed.


Is The Dow Jones Utility Index Ready To Make A Sharp Move Higher?

Posted in Dow Jones Utility Index (DJU) on August 9th, 2010 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

Although taking some time to develop, the Dow Jones Utility Index (DJU) appears to be setting up for a solid move upward. A bullish “reverse head & shoulders” pattern that has been in the making since the post-Lehman Brothers plunge in October 2008 continues to form, targeting a potential move up to the 525 area.

Fostering this technical viewpoint is an apparent fundamental thirst for yield. Persistent pressures from pension plans, retirees, college endowments and others who rely on interest and dividends for their day-to-day needs are finding low yielding U.S. Treasuries, intermediate-term CD’s and money market accounts extraordinarily stingy.

While a good number of investors continue to tout their preference for the “return of their capital”, rather than “return on the capital”, others are becoming weary of that standpoint. As a result, there is a growing chorus of advisors that point out that many S&P 500 common stocks, including utilities, are paying higher dividend yields than are 10-year U.S. Treasury notes.

Because the balance sheets of most utility companies are typically laden with debt, the worry has been that rising interest rates would not only compete with yields on their common stocks as an investment vehicle, but would also become more costly to them as they routinely refinance their outstanding debt if in a rising rate environment.

Following Friday’s disappointing employment data, as well as Goldman’s Sachs’ forecast for the unemployment rate to inch up to 10% into 2011 and stay there for the remainder of the year, the expectation for interest rates to rise has once again been muted. In addition, a potential decline in interest rates could result in lower debt costs to utility companies, That, in turn, should make those who thirst for yield to take a harder look at utility common stocks.