U.S. Treasury bonds and 10-year notes regained 200-day moving average, winning battle in an overall losing war

It's one thing to perceive that in the future, the U.S. bond ratings will be jeopardized by all the deficit spending. It's another thing to see even a small step in that direction. As usual, market prices precede the news - so as you see in the charts below, Treasury bonds and 10-year notes already tumbled well off their highs almost a year ago. Now they've regained their respective 200-day moving averages. And it's possible they may trace out another up-wave still - so bond investors may as well use that key moving average as a place for stop-loss protection and buy-stop orders, as we wait to see if bonds can eke out another such victory of higher prices, lower rates. But it's difficult to get really excited about buying when the fundamentals seem bearish - or would it take another market scare to drive investors to bonds again (as occurred a year ago)? No wonder we see the choppy, see-saw waves on those charts.

Technically, Treasuries are still suffering from the bearish cross in which the 50-day moving average fell under the 200-day. The current rally is now bringing them closer together again. If they can make a bullish "golden cross" back up again, then a bond rally should gain more strength. But it's dicey, and will take some real positive price movement - which isn't guaranteed.

So any further movement above this important moving average is probably only a temporary victory for Treasury prices, in a bigger "war" that's more likely to be won by higher rates. For now, there might be a temporary "buy the news" rally that remains possible. Some of yesterday's news was this: U.K., U.S. Top Aaa Ratings Tested by Debt Burdens, Moody’s Says - Bloomberg.com. Here's part of it:

Dec. 8 (Bloomberg) -- Moody's Investors Service said the top debt ratings on the U.S. and the U.K. may "test the Aaa boundaries" because public finances are worsening in the wake of the global financial crisis.

"The deterioration has been pretty severe," said Pierre Cailleteau, managing director of sovereign risk at Moody's, in a Bloomberg Television interview in London. "We expect a pretty strong policy response in the next couple of years in order to keep the debt in the Aaa range. We expect them to bend but not to break."

The U.S. and U.K. have "resilient" Aaa ratings, as opposed to the "resistant" top ratings of Canada, Germany and France, Moody's analysts led by Cailleteau said in a report today. None of the top-rated countries is "vulnerable," or have public finances that are "stretched beyond the point of 'no return' to the Aaa category," New York-based Moody's said.

The U.S.'s debt burden will climb to 97.5 percent of gross domestic product next year from 87.4 percent, the Organization for Economic Cooperation and Development forecast in June.National debt in the U.S. climbed to $7.17 trillion in November. The U.K.'s public debt will swell to 89.3 percent of the economy in 2010 from 75.3 percent this year, according to the OECD.

"There has been a huge increase in debt-to-gross-domestic- product ratios as a result of the crisis," said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. "It's right that there should be a lot of attention and pressure on these numbers."

'Resistant' Countries

All Aaa rated governments are affected by the global financial crisis, with differences in their impact and ability to respond, Moody's said. "Resistant" countries, which also include New Zealand and Switzerland, started from a more robust position and won't see debt exceeding levels consistent with their Aaa status, Moody's said.

Moody's defines "resilient" countries as "Aaa countries whose public finances are deteriorating considerably and may therefore test the Aaa boundaries, but which display, in our opinion, an adequate reaction capacity to rise to the challenging and rebound."

The cost of protecting U.S. debt from default was unchanged at 32 basis points, or $32,000 a year to protect $10 million of the nation's bonds from default for five years, according to CMA DataVision prices. That compares with a peak of 100 basis points in February and 20 basis points in October.