There are several cross currents in the bond market as many kinds of debt instruments are still holding to their uptrends from this summer. Last week we said to shift focus to the five year note as it had been the most �technically proficient� and therefore held the most useful information as to the market�s overall direction. The five-year note rallied to our cited resistance at 110 last week then recorded a bearish weekly reversal just when we were about to throw in the towel. Recall that weekly reversals are much more significant at key technical levels so we will want to monitor the 110 handle over the next week to see if resistance holds. The other chart we showed was that of Treasury bonds over the gold to yield ratio. We said, that there was hardly, �a more beautiful array of technical indicators lining up to say the bond market is topping.

As such we strongly feel that despite the sloppiness in price action bond prices should begin to head lower very soon. If they do, it will also help our forecast for both the dollar and stocks.�

Considering that the Fed has made it clear that short term rates will continue to rise the old adage that you don�t want to own bonds when the Fed�s raising rates should hold. And with the inflation adjusted Fed funds rate still at zero the Fed is seen as behind the curve and may have to raise rates to 3% next year. Finally, if the dollar rallies as we expect it too, Asian central banks will no longer have to purchase our debt, thus taking away this artificial support.

http://www.fxmoneytrends.com/weeklycommentcharts/12.16.04.goldyieldusd.GIF

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