QE2 breaks US 30 year bond uptrend

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The Fed meets next week and it is expected that they will announce their intentions on quantitative easing. The expectations are for another round of large scale US Treasury purchases in effort to push interest rates down and thus stimulate the economy. The Fed has also recently suggested that it may look at inflation targeting. Targeting inflation would set a explicit growth target in price levels that the Fed would attempt to achieve. The aggressive talk by Fed has halted the nearly year long rally in the long bond.

While no one can predict the outcome of this QE experiment, we must try to prepare for the possibility that it does have some positive stimulus effect on inflation and the economy. The recent break of the uptrend in long term bond prices along with other recent negative technical signals is enough to cause us to move some of our fixed income exposure away from the long end of the Treasury curve to shorter duration instruments.