From the Desk of Ian Culley @IanCulley
US Treasury futures are breaking out.
The 30-, 10-, and 5-year contracts are trading above our risk levels. And the bond ETFs we covered a couple of weeks ago are also flashing buy signals.
The bond market is sending a well-advertised message to all investors…
It’s time to buy bonds.
Let's review one of the most liquid treasury ETFs, $TLT.
Zooming out on the weekly chart of the Treasury bond ETF TLT…
We have a potential failed breakdown below the former 2014 lows, followed by a tight, multi-month consolidation.
A clear break above 110 and the former 2018 lows turns our view higher toward 135.
On the other hand, a resolution below 100 carries downside risks back to the 2011 lows at approximately 88.
Based on the overwhelming number of breakouts across US Treasuries, the weight of the evidence suggests a higher likelihood of an upside move.
So where are we right, and where are we wrong?
The line in the sand for TLT comes in at 109.75. Let’s call it 110.
That level coincides with June 2022 pivot low and a recent shelf of former highs.
If and when TLT takes out that critical level, we like it long with an initial objective of approximately 120.
Perhaps you noticed that’s a move of less than 10%. You’re correct!
Remember, trading bonds isn’t supposed to be exciting. If you’re looking for some juice, there are always the futures markets.
Buying bonds signals a crucial turning point in the cycle, as US Treasuries offer investors a haven after a long respite.
Bonds catching a bid isn’t necessarily a negative development for stocks and other risk assets.
The pace is the trick, and "slow and steady" the mantra. A rip-roaring rally in treasuries would likely accompany selling pressure for the major equity indexes.
Stay tuned!
Countdown to FOMC
After the recent 25 basis-point increase, the market is pricing in a potential pause in the hiking cycle at the May 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 April 5, 2023.
Thanks for reading. As always, be sure to download this week’s Bond Report!
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