US Treasuries are off to their worst start in more than a decade as rates rise across the curve.
The US Aggregate Bond ETF $AGG is down more than 4% year to date. Treasuries can’t manage to catch a bid. And High-Yield Bonds $HYG have fallen off a cliff.
But this could all change quickly. Especially if stocks continue to sell off.
Money has to go somewhere as it flows out of equities. And with many bonds testing critical levels, it would make sense to see prices mean revert, at least in the near term.
Let’s take a trip around the bond market and discuss some of the key levels on our radar.
First up is the long duration Treasury Bond ETF $TLT:
After dropping 5.4% in the last three months, TLT has paused at a logical area of former support around 135. This the same level price rebounded from late 2019 and early 2021.
The last time TLT bounced off these levels was when many risk assets peaked back in May of last year. We’re watching to see if we get a similar reaction from markets this time around.
When we move down the curve, the 10-year T-note is also finding support at a logical level:
The US benchmark note is down almost 6% over the trailing six months. It’s currently finding its footing at a key Fibonacci retracement level around 126’11. We wouldn’t be surprised to see a tactical bounce here, or at least some consolidation.
The 5-year T-Note looks almost identical to the 10-year:
After a steep decline, it’s running into a key retracement level and looks a lot like the 10-year note.
As with the 10-year, we expect some mean reversion, or at least a pause in the ongoing downtrend.
When we look at shorter-duration bonds, you'll notice the recent downside moves have been even more extreme.
The 1-3 year Treasury Bond ETF $SHY has been challenging the notion that price doesn’t move in a straight line as it’s collapsed lower since last fall:
Like the longer-duration bonds, it’s trying to find a bottom at a key retracement level. After such a steep decline, a pause in the downtrend would be healthy – and highly likely.
It’s not just Treasuries testing crucial levels. High-yield corporate bonds are, too. Here's a chart of the Fallen Angel High-Yield Bond ETF we highlighted last week:
Buyers are defending this level of former resistance turned support around 30.55.
Like US Treasuries, these high-yield bonds have been under relentless selling pressure. But there's finally some evidence this is changing.
For the first time in months, all of these charts appear to be finding support.
Regardless of duration or credit rating, bonds have reached a point where we no longer want to press shorts. We’re much better served to feed the ducks at these levels.
For now, we want to take some money off the table and wait for the trend to either resume or reverse.
We’ll let you know when it does.
Stay Tuned!
Countdown to FOMC
Following the most recent Federal Open Market Committee meeting (and the release of the meeting minutes last week), the market is pricing in a 25 basis point rate hike in March 2022.
Here are the target rate probabilities based on fed funds futures:
This data is from the CME FedWatch Tool as of February 23, 2022.
Thanks for reading. As always, let us know what you think.
And be sure to download this week’s Bond Report!
You need to have a subscription to access this content in full.
Log in or
subscribe
