From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Long-term interest rates have taken a hit this week, while the short end of the curve has continued higher. When we zoom out a bit, yields have been rising across the curve since this summer.
During the past few months, the 2-year yield has ticked higher by more than 30 basis points (bps), the 5-year has increased by almost 60 bps, and the 10-year has gained 40 bps. But when we look all the way out to the 30-year, it's only risen by roughly 20 basis points.
Rates are rallying across the board, Treasuries are trending lower, and bond market investors are favoring TIPS and higher-yielding securities.
How do we want to position ourselves in this kind of environment?
Well, we definitely don’t want to be buying Treasury bonds.
In today’s post, we’re going to take a trip around the fixed-income market and discuss some US Treasury funds we can use as vehicles to express our thesis.
Let’s start on the shorter end of the curve with the 1-3 Year Treasury Note ETF $SHY:
SHY has been nothing but a hot mess following a near-vertical move during the pandemic selloff. There hasn’t been much to see here since its peak last year, as it’s been a steady grind lower toward a key retracement level.
That changed last week when price broke down below the critical level around 85.89.
As long as this breakdown remains valid, we want to be short with a downside target of 85.35 over the next 2-4 months. With the short end of the curve accelerating, we think there’s a good chance our objective will be hit sooner rather than later.
Another thing we like about this setup is that we should know right away if we’re wrong. If it closes above 85.89, we have no business being short SHY.
Next, let’s move up to the 3-7 Year Treasury ETF $IEI:
IEI recently broke a key pivot low from April and collapsed to fresh 52-week lows. This is another excellent opportunity to short Treasuries, as our risk is very well-defined at the Q2 trough, around 129.60.
We want to be short against this level with a target of 127.80 over the next 2-4 months.
Again, we’ll know very quickly if we’re wrong as our risk level is just overhead. If it’s back above 129.60, IEI is a no-touch.
Next, we have the 7-10 Year Treasury ETF $IEF:
After failing to close the gap from February, IEF is back toward the bottom of its trading range. Price is testing a level of former resistance turned support around 114. Notice how this polarity zone has marked several key turning points in the trend since 2016.
All the price memory at this level makes it a great place to define our risk. We’re looking for a decisive close below last week’s low of 113.63 to kick off the next downside leg.
We want to sell on weakness below those former lows with an objective of 108.50 over the next 2-4 months.
Our bias remains neutral until it breaks down.
One more interesting note: The corresponding 10-year T-note futures have already broken to new 52-week lows, taking out the pivot lows from earlier this year. We anticipate IEF will follow suit.
Finally, let’s check out the longer end of the curve. Here’s the 20+ Year Treasury Bond ETF $TLT:
Unlike the shorter end of the curve, TLT is closer to its summer highs than its pivot lows from earlier this spring.
We can get short at current levels by defining our risk around 149 and the former 2019 highs. The risk/reward is in our favor, with a tactical downside objective of 134.90.
We could even loosen our stop to just above the July pivot highs around 153 to give the trade a little more room.
But the longer-term trend remains range-bound until we get a clear breakdown beneath 134.90. If and when this happens, we want to sell weakness with a target of 111.80.
Either way, It all comes down to job No. 1 -- managing risk.
That’s it for our review. We hope you enjoyed this little trip down treasury lane!
Thanks for reading. As always, let us know what you think.
And be sure to download this week’s Bond Report!
