From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Bonds are digging in at some familiar levels.
For years now, we’ve pounded the table about the importance of the 2018 highs for various risk assets.
That’s because those former highs marked significant peaks for both the stock market and certain procyclical commodities and currencies during the last cycle.
As far as the bond market is concerned, 2018 was also when yields peaked. Benchmark rates in the US are testing these old highs.
As such, it’s not the 2018 highs but the 2018 lows that we’re paying attention to when analyzing the prices of Treasuries.
A handful of bonds and bond funds are trying to find a bottom at these key former lows right now.
Let’s take a look.
Here’s a chart of the 20+yr T-Bond ETF $TLT:
![](https://media-allstarcharts.s3.amazonaws.com/wp-content/uploads/2022/05/TLT.png)
After completing a multi-year head-and-shoulders top in March, TLT found support in a hurry at its 2018 lows. Following the steep downside action, the current pause comes with a bullish divergence in momentum.
Interestingly, the last time price tested this critical level, the 14-day RSI registered a similar divergence. This led to a rally in bonds that lasted well over a year. The chart is setting up the same way today.
While the underlying trend is lower for bonds, these defensive assets are at a logical level to build a bottom… or at least put in a tradable low.
At the same time, if bonds do not experience some mean-reversion at this natural support level, that will be valuable information as well.
When price ignores a logical level of interest or fails to bounce off support, it simply speaks to the strength of the ongoing trend. In this case, that trend is undeniably lower.
While bonds aren’t ignoring this level, they haven’t really moved higher off it either. We’ll know more soon.
Regardless of how TLT reacts here, it’s currently offering a clean and well-tested level to define our risk against. If those 2018 lows are violated near 112, we want to keep riding this downtrend toward the 2014 lows around 101.
For now, our tactical outlook is neutral as a counter-trend move makes sense here.
How US Treasuries respond to their former 2018 lows in the coming weeks and months will provide us with critical information.
Earlier in the year, global equity indexes gave us a key data point when they lost their 2018 highs. Stocks have been under pressure ever since.
We think this is a similar inflection point for bonds. Stay tuned!
Countdown to FOMC
Following the Federal Reserve's recent rate hike, the market is pricing in a 50-basis-point hike at the June meeting.
Here are the target rate probabilities based on fed funds futures:
![](https://media-allstarcharts.s3.amazonaws.com/wp-content/uploads/2022/05/image365.png)
*Click table to enlarge view
This data is from the CME FedWatch Tool as of May 19, 2022.
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