Last Thursday, Ben Bernanke announced that the Fed would embark on QE3 – a controversial strategy aimed to reduce unemployment and increase spending. Because the Fed has already lowered interest rates to near zero, it has no choice left but to implement unique and unknown strategies to assist the economy.
And Thursday’s announcement was no exception.
The Fed said it would purchase $40 billion of mortgage-backed securities (MBS) each month until employment began to recover. It’s important to note that the Fed did not say what constitutes a recovery. Some analysts have already dubbed the new program, “QEternity” because it lacks an exit strategy.
Stocks cheered the announcement, although bonds hardly reacted the same way.
Because Ben Bernanke’s plans support bond yields, bond prices often rally before and during Fed interventions. However, this time was different. Not only did bonds fail to rally ahead of the Fed announcement, yields collapsed after the chairman announced QE3.
The iShares Barclays 20 Year Treasury Bond (NYSE: TLT) ETF was murdered in the process (when bond yields increase, bond prices move lower). In fact, the TLT is off by 7% this month. If buyers don’t step in now, this could get ugly.
The ETF is currently sitting atop its 200-day moving average (blue line). TLT hasn’t crossed below this since December 2010, when it proceeded to decline to $83 from $90. The ETF made a bullish cross above in May 2011 and went on to rally all the way to $131.
Buyers need to step in and support TLT at the 200-day moving average. Any failure to do so will likely result in a fast decline back to $111 (an established support zone). However, a lack of support at the 200-day may indicate a larger change of trend has taken place, marking a top to bonds.
Equities mentioned in this article: TLT