Two Reasons We Like Bonds

From the Desk of Ian Culley @Ianculley

Bonds are flying under the radar.

While everyone focuses on the S&P 500 finding resistance at its 200-day moving average, bonds are posting their most substantial rally since the early 2020 peak.

Treasuries have represented downside risk for almost two years. We get it. Nobody's wanted bonds!

Neither have we – until now.

Here’s why…

Momentum

The long-term Treasury bond ETF $TLT has gained almost 20% since late October. In the process, it registered its largest four-week rate of change in a decade (aside from the covid related volatility).

This is what a momentum thrust looks like:

Notice the previous rallies in mid-2021 and earlier this summer (highlighted in yellow).

Both advances failed to produce sustained strength. It not only shows in price but also in the lackluster momentum readings that followed (highlighted yellow in the lower pane).

The bond rally today paints a different picture – one of strength.

Powerful momentum thrusts tend to occur at significant turning points, adding to our conviction of a potential failed breakdown in treasuries. 

We’re monitoring TLT for continued follow-through as investors reach for bonds after one of the worst years in history for US treasuries.

Relative Strength

"Bonds" and "relative strength" in the same sentence… Oh, stop it!

It might sound crazy, as it goes against our recency bias. But, lucky for us, we have the charts.

Check out the bonds versus stocks ratio TLT/SPY:

Treasuries are outperforming stocks in the near term, reclaiming a shelf of former lows going back to April. 

Whether this signal ushers in a new structural trend is not the point. What is important is the conviction added to the buy signals triggered in the five-, the 10-, and the 30-year last week.

It’s simple: We like buying lines trending higher or going up.

Bonds fit that pre-requisite on absolute and relative terms. Add a significant momentum thrust following one of the worst-performing years on record…  

And you have one helluva tactical buying opportunity on your hands! 

Countdown to FOMC

Following the most recent news flash, the market is pricing in a double-hike in December.

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 December 8, 2022.

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

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