Are You Buying the Breakout in Bonds?

From the Desk of Ian Culley @Ianculley  

"Trade what’s in front of you."

We say it all the time.  And it sounds simple enough.

But, with an immense amount of information circulating, it can be difficult to distinguish what’s important. 

That’s why we focus on price. Price filters the noise and useless data.

At the end of the day, it's price that pays. 

So, if bonds are breaking out to fresh multi-month highs, we should buy bonds, right?

Here’s a quick look at the bond market buy signals triggered earlier in the month: 

All three are still in play.

The five, 10-, and 30-year Treasury futures continue to churn above our risk levels. As long as that’s the case, we want to remain long toward our upside objectives.

If you missed these breakouts or wanted to wait for additional confirmation, the two-year T-note offers another chance to capture a tactical bounce.

Check out the daily chart of two-year T-note futures:

We want to see a decisive break above the October pivot highs like the longer-duration notes. If and when it closes above 103’01, we’re buyers on strength with a target of 105’12.

Remember, these are tactical trade setups. Could these turn into sustained uptrends? Sure. That’s not the bet we’re making, though.

Instead, these trades involve following the path of least resistance – nothing more. 

That path leads higher for bonds in the near term – but only if they hold above their breakout levels.

Our risk is well-defined at 103. And the reward is skewed in our favor. What else could we want?

Despite a favorable clean setup, trading what’s in front of us often presents challenges. That’s expected. If this game was easy, everyone would win. 

That’s why it’s crucial to focus on risk management and follow your trading plan.

And don’t worry if this trade isn’t for you. The markets will provide another opportunity soon enough.

Stay tuned!

Countdown to FOMC

Following yesterday's double-hike, the market is pricing in a single-hike at the February meeting.

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 15, 2022.

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

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