Interesting Spread Trade: The Yield Curve Steepener via ETFs

It goes without saying that there's been some interesting trading in bonds lately.  We all know that bonds, especially treasuries, are in a bubble.  The big question is: when does it end?  Some pros have already called the top in bonds and others say there's no telling how low the fed will bring down yields.  What I find to be interesting is the relationship between the shorter term bonds versus the longer term bonds. 

Here's a chart of SHY, which is the Barclays 1-3 Treasury Bond fund etf:

Notice in this chart that prices took a small dip recently but have retraced most of the fall and appear to be ready to re-test their highs.  I would state that this is a pretty bullish looking chart.  Now compare that to the daily chart of TLT, the Barclays 20+ year bond fund etf:

This price action in TLT has taken a dip just like SHY, however, it has failed to rebound at all.  In fact, it appears to be testing it's uptrend and is looking dangerously close to entering the 3rd Stage of a trend which is the top prior to the Stage 4 crash.  The weekly chart of TLT looks quiet bearish, however I'm going to leave it up to you to look at it as I don't won't to overdo the number of charts in this post. 

One last chart that is interesting.  This is a weekly pair chart of SHY and TLT together.  So when looking at this chart, for the price to go up, SHY would continue to go up and TLT would go down, or SHY would go down but TLT would go down more.  Here's the chart:

In the above chart, you can see that I highlighted 3 different areas of price action.  The first is "Normalcy" which is where prices of SHY:TLT have been during relatively stable times.  The "Nervous Market" area is where prices have been when the market is concerned about another severe crash..where we are now.  "End of the World" is where prices went when it looked like the financial system was going to break down all together..that was as bad as things could get without a collapse of the entire banking system. 

The question is:  do we think it's likely we'll go back to the "End of the World" zone or will bonds trade back to the Normalcy area?  Short of a Sovereign default or something outrageous happening, I'm betting we trade back to normal levels and maybe even overshoot those levels if people panic and dump their treasuries.  Time will tell.

TLT