Bonds Pump the Brakes

From the Desk of Ian Culley @Ianculley

Bonds are bouncing off key levels of potential support.

For some, it’s a former low. And for others, it’s a downside extension level. Regardless, we can all rejoice that bonds have stopped falling.

That doesn’t mean we’re rushing out to buy Treasuries. Instead, it signals a constructive start to a potential bottoming process for the bond market and relief from downside volatility.

Let’s check out the charts!

First up is the long-duration Zero Coupon ETF $ZROZ:

ZROZ has rebounded above its former 2014 lows, posting a potential failed breakdown. Risks are to the upside above 82 with potential resistance at the shelf of former lows around 100.

It’s a similar story for the Treasury Bond ETF $TLT:

T-bonds reclaimed their former 2014 lows on Wednesday. As long as TLT holds above 101.50, our tactical outlook is higher.

While our near-term bias is to the upside, we’re not ready to get long TLT. There are better trades out there right now.

Instead, these failed breakdowns simply provide valuable information, indicating a pause and potential reversal in the primary downtrend.

Moving toward the middle of the curve, the three to seven year US Treasuries ETF $IEI found support at a level coinciding with its former 2011 lows.

Risks are to the upside as long as IEI holds above those former lows near 113. It’s constructive to witness shorter-duration bonds digging in as well. 

This additional evidence adds to our conviction of a reprieve in selling pressure for long-duration assets. The same is true for emerging market bonds.

It’s not just US bonds digging and catching higher. Check out the Emerging Market Bond ETF $EMB:

EMB sliced through a critical extension level last month and reversed higher. Now, it’s challenging its 2020 lows from below. A break back above 85 flips our outlook higher for EMB and bonds in general.

If you want to take a shot at trading these ETFs from the long side, go for it. The risks are well-defined at the recent pivot lows. Despite the clear levels, we’re not crazy about buying bonds -- at least not yet. 

Whether bonds catch higher or chop sideways is beside the point.

They’ve stopped going down!

That’s the critical piece of information for bond and stock market bulls. It’s a bullish development for both asset classes. 

We'll have a higher degree of conviction that risk assets are turning the corner if US treasuries can stop falling and carve out a tradeable low.

For now, the break in bond market volatility removes a yearlong headwind for stocks.... and that's a huge step in the right direction.

As investors and traders, we can all be grateful that bonds have stopped falling.

Happy Thanksgiving!

Countdown to FOMC

Following the release of the FOMC minutes, the market is pricing in a double-hike in December, followed by a double-hike in February.

Here are the target rate probabilities based on fed funds futures:

Click the table to enlarge the view.

This data is from the CME FedWatch Tool as of November 23, 2022.

Thanks for reading. And please let us know what you think.

As always, be sure to download this week’s Bond Report!