Dec. 17 (Bloomberg) -- It was only last April when John Kosar, the president of Asbury Research, insisted that anyone with a pencil and ruler could prove the 25-year bull market in Treasury bonds was over.

Kosar said then that the looming decline was so obvious even a five-year-old could see yields would climb for ``many years'' to come. He acknowledged in an interview last week that ``trends have changed'' since July, when subprime mortgage losses began to contaminate credit markets. Citing charts of 30- year bond futures, Kosar said from his office in Lake in the Hills, Illinois, that the government bond market ``did an about- face'' and is now ``pointing to lower'' yields.

The yield on the 10-year U.S. note fell as low as 3.79 percent on Nov. 26 from a five-year high of 5.32 percent in June as investors sought the safety of government debt amid mounting losses on securities linked to borrowers with poor credit. Treasuries have returned 7.71 percent this year, the most since 2002, when they gained 11.6 percent, according to Merrill Lynch & Co. index data.

The sudden rise in the cost of credit sparked by the subprime collapse forced technical analysts, who make market predictions based on historical price patterns, to change their expectations. The difference between the interest rate banks pay for three-month loans and government borrowing costs, called the TED spread, reached 2.21 percentage points on Dec. 11, the highest since Aug. 20. The last time the spread was this high this long was in the aftermath of the 1987 stock market crash.

Yamada's Timing

The subprime upheaval ``pushes out'' by ``years'' the time it will take for the 10-year note's yield to rise above 5.5 percent, said Louise Yamada, who runs Louise Yamada Technical Research Advisors LLC in New York. Yamada, the top-ranked technical analyst in Institutional Investor magazine's annual survey from 2001 through 2004, still says the U.S. bond market is in transition to a bear market.

Banks from Barclays Capital Inc., the securities unit of London-based Barclays Plc, to RBS Greenwich Capital Inc. in Greenwich, Connecticut, are reducing estimates for higher yields. The 10-year note will reach 4.50 percent at the end of 2008, according to the median forecast of 62 economists and strategists surveyed by Bloomberg from Dec. 3 to Dec. 10. In a July survey, the median was 5.31 percent.

Taken by Surprise

The yield on the benchmark 4 1/4 percent note due in November 2017 rose 13 basis points to 4.24 percent last week, according to bond broker Cantor Fitzgerald LP in New York. The price fell 1 2/32, or $10.63 per $1,000 face amount, to 100 3/32, after central banks in the U.S., U.K., Canada, Switzerland and the euro region agreed to coordinate efforts to promote lending and restore confidence in credit markets. The note yielded 4.15 percent as of 4 p.m. today in New York.

Technical analysis is based on the theory that a chart of the price of any asset or index contains clues about future movements. Rice farmers in 17th-century Japan used the tool to monitor and forecast crop prices and it was popularized by Charles Dow, who created the Dow Jones Industrial Average in 1896.

``You should always heed what the charts are saying,'' though over-reliance ``can be a self-fulfilling prophecy,'' said David Ader, head of U.S. government bond strategy at RBS Greenwich. RBS is one of the 20 primary dealers that trade directly with the Federal Reserve.

Accelerating inflation is making some investors wary of Treasuries. U.S. consumer prices rose 0.8 percent in November, the most in more than two years, the Labor Department said Dec. 14.

Pioneer Boycotts

``We're still concerned,'' said Richard Schlanger, a bond fund manager at Boston-based Pioneer Investments, which oversees about $44 billion in fixed income assets in the U.S. Schlanger isn't purchasing Treasuries, he said.

The subprime losses took analysts and policy makers by surprise. The Fed has reduced its target rate for overnight loans between banks three times since mid-September by a total of 1 percentage point to 4.25 percent.

At the end of 2006, the median forecast of 22 primary dealers surveyed by Bloomberg News was a target rate of 4.75 percent by the end of this year. The only firms to correctly predict the decline were Zurich-based UBS AG, Frankfurt-based Deutsche Bank AG and Dresdner Kleinwort, a unit of Munich-based insurer Allianz SE.

Two-year note yields plunged to 2.79 percent on Dec. 4, the lowest since 2004, from 5.13 percent on June 13, according to Cantor Fitzgerald. The yield on the 30-year bond touched 4.23 percent on Nov. 26, the lowest since 2005, before ending last week at 4.66 percent.

`Blindside Everybody'

``Charts tell you what's going on in the market,'' said Kosar, 51, whose appreciation for technical analysis dates back to 1980, when his job as a runner on the floor of the Chicago Mercantile Exchange gave him insight into the tools used by successful traders. ``When these changes happen, they blindside everybody.''

Banks including New York-based Citigroup Inc. and Merrill Lynch have reported more than $76 billion of writedowns this year on securities linked to subprime mortgages, collateralized- debt obligations and structured investment vehicles, or SIVs. Barclays Capital last week estimated that banks may write down $200 billion more.

Citigroup, the biggest U.S. bank by assets, said last week that it will take over seven SIVs and assume $58 billion of their debt to avoid forced asset sales that would further erode confidence in capital markets. Citigroup's credit rating was cut one level to Aa3 from Aa2 by Moody's Investors Service.

Market Shifts

The bull market in U.S. government debt began after policy makers led by then-Fed Chairman Paul Volcker increased the target rate to a peak of 20 percent in March 1980, to stem inflation that reached as high as 14.8 percent. Bond yields rose in the bear market from 1946 to 1981.

Historically, the shift between bull and bear markets hasn't been immediate, Yamada said. Her analysis of long-term cyclical trends stretches back to 1790, when Alexander Hamilton served as the first U.S. Treasury Secretary.

The 8 percent return since mid-June is ``an extension of the trading range environment, which is characteristic of every reversal from falling rate cycles to rising rate cycles,'' she said. ``We're talking about a 26-year cycle that historically has taken two to 14 years to reverse.''

Primary dealers at the end of last year expected yields on two-year debt to finish 2007 at 4.49 percent, based on their median forecast. For 10-year notes, they predicted 4.62 percent.

Fed Meetings

Prices on federal funds futures indicate traders now place an 88 percent likelihood on the central bank lowering the target rate to 4 percent at its meeting Jan. 30. The data signals they see a 41 percent chance of a subsequent cut to 3.75 percent at the March 18 meeting.

The economy may grow 1 percent this quarter and 2.7 percent in 2008, according to the median forecast of 63 economists surveyed by Bloomberg between Dec. 3 and Dec. 10. Economists in separate surveys predict that by the end of 2008, yields on the two-year Treasury note will reach 3.8 percent, and on the 10- year, 4.5 percent.

``The trendline is not the issue, it's the symptom of the issue,'' said Kosar, who still expects the 10-year yield to rise. The extent of its increase will depend on the housing market, he said.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

Last Updated: December 17, 2007 16:09 EST