A Kick Save From Rates

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

The recent risk-off action came to a head last week, with commodities, stocks, and interest rates all violating key support levels. 

We saw a brief flight to safety, as long-term treasury bonds $TLT broke out to their highest level since early January.

Yes, money was flowing into bonds, which is not a good look for stocks and commodities.

Bottom line, there was a lot of damage done to the primary uptrend in a very short time. Market participants needed to come out and repair the damage ASAP.

In the handful of trading sessions since the selling stopped, bulls have managed to claw back much of the losses from last week.

Buyers needed to quickly step up to the plate. And that’s exactly what we’re seeing right now, as stocks and other risk assets are rebounding aggressively off the recent lows.

As for bonds, the breakout in TLT failed, and the 10-year and 30-year both snapped back above critical levels.

The bond market has been sending some strong signals lately for those who are listening. Let’s check in on some charts and see what the message of the past few days has been.

In recent posts, we’ve pointed out that the longer end of the curve was most vulnerable to downside action. So it was no surprise when the 30-year broke below its summer lows around 1.75 as the market came under pressure last week.

With the recent bout of selling pressure behind us, the 30-year is reclaiming those former lows. The questions we're asking now are...

Will we see upside follow-through in the form of a swift move higher? Or will it continue to chop sideways?

As we pointed out in prior posts, the long end of the curve doesn’t have to outpace the short end, but it does need to participate. A quick bounce in the 30-year would be a crucial development in getting the global growth narrative and reflation trade back in gear.

If longer-duration rates don’t begin to trend higher, we should expect more sideways action from the middle of the curve as well.

That brings us to the US 10-year yield $TNX:

Like the 30-year, it broke below our level but immediately bounced back. We’ve been pounding the table about the importance of this 1.40 level. It’s been our line in the sand for years! 

Now that the 10-year is back above it, how it reacts in the coming weeks will provide valuable insight regarding the near-term direction of risk assets.

A quick move higher would be constructive. On the other hand, if rates simply chop sideways at these former lows, there is a high likelihood they eventually make a sustained downside resolution. 

Not only do we need to see the 10- and 30-year dig in here and start trending higher again. We’re also looking for confirming evidence from Treasury spreads and other areas.

The best confirmation would come from banks reclaiming their first-half highs. But we don't think that's likely to happen in an environment where the 2s/10s spread is collapsing.

While it's only been a few days, both the banks and the 2s/10s have seen some pretty weak bounces. Bulls want to see this change... and fast!

Rates just made a nice kick save, and there’s no way to view that as anything but a bullish development. But there’s still work to do.

Now we need to see some upside follow-through and confirmation to make it a real beauty.

Stay tuned! We’ll keep you posted.

Thanks for reading. As always, let us know what you think.

And be sure to download this week’s Bond Report!