Bonds ready to MOVE ! - Nov 19, 2011

Realized volatility reversion studies on US treasuries now say volality is ripe to move higher. Bond prices are about to have a large move. The last time bonds gave this type of signal was Oct 24th which resulted in prices according to the TLT moving from 113 to 116.35 to 109.80 to 119.50 all within 6 trading sessions! Thats quite a burst in volatility and is illustrated by the vertical magenta line on the plot above.

So the billion dollar question is which way will this expected volatility unfold this coming week?I believe the primary result will be lower bond prices (higher bond yields) to agree with the expected low in risk due by Tuesday. Currently 119.30 for the 20y bond etf, TLT, the price target will be 104.00 which will equate to seeing the 10y bond yield trade higher, well north of 2.5% (current 10y is 2.0% yield).

Note the previous low in bond prices took place on Oct 27th (high in yields) and this was generally speaking the high in risk across all asset classes, most notably equities and AUDUSD. This Oct 27th price point was not entirely surprising as it equalled the the price HIGH that took place Aug 25, 2010 as labelled on the chart above. Another classic case of old highs (Aug 2010) becoming future lows (Oct 27, 2011). As far as the state of reversion goes, I believe bond prices are now in a similar position as was seen early Oct 2010 which is the vertical magenta line on the left side of the chart above. The reversion indicator along the bottom of this plot illustrates the similar conditions at both vertical magenta lines and now.