From the Desk of Ian Culley @IanCulley
US Treasuries have stopped falling – for the moment.
But it’s a mixed bag.
Short setups for long-duration bonds remain in play despite pullbacks underway, while the shorter end of the curve never managed to break down.
It’s messy.
So, let’s run through the US Treasury futures for an updated read on the bond market.
First up is the 30-year T-bond:
The 30-year has broken below a shelf of former lows at approximately 123. It’s a short as long as it’s below that level with a measured target of 113’15.
But the 30-year is finding support at last year’s lows, bouncing higher toward our line in the sand.
Pullbacks such as this are common. And last year’s low marks a logical area for buyers to support price.
Nevertheless, the breakdown remains intact as momentum holds within a bearish regime after recently hitting oversold conditions.
Moving down the curve...
The 10-year T-note doesn't exhibit an overly bearish outlook:
Price is back above a shelf of former lows and our breakdown level.
A pullback of this nature could be nothing more than a hard retest (a close back within the pattern in question) that leads to a re-completion of the bearish consolidation.
On the other hand, it could also become a failed breakdown, resulting in a speedy upside reversal.
It’s important to note that momentum remains within a bearish regime but failed to post an oversold reading on the most recent leg lower.
If you want to short the 10-year, it must trade below 110’13. It’s off-limits until then.
And a decisive breakdown never occurred for the five-year T-note.
In fact, no downside resolution has taken place of any sort:
The five-year continues to hold above the 105’20 level. As long as that's the case, I find it impossible to carry a short position.
Yes, momentum hasn’t hit overbought in over two years. But I trade price, not the 14-day RSI.
I also prefer shorting the longer end of the curve as it leads shorter-duration bonds to the downside.
This won’t stop me from monitoring these bonds for confirmation of the sell signal for the longer-duration bonds.
Interestingly, last week’s sell signal for the two-year T-note didn’t amount to much:
Instead of following through to the downside, the two-year almost immediately reversed higher.
And while momentum remains in a bearish regime (a common thread across the curve), the 14-day RSI is posting its highest reading since March.
As we move across the curve, the 30-year is the only short bond trade still in play.
Bulls have reclaimed the breakdown level in the 10-year. The five-year holds above support. And the two-year has posted a potential failed breakdown (though it wasn’t much of a break to begin with).
Regardless, I still don’t like buying bonds at these levels, at least not until bullish data points appear on the charts.
I'd rather lean in the direction of the 30-year T-bond and wait for bearish confirmation from shorter-duration notes.
Stay tuned!
Countdown to FOMC
The market is pricing in a pause in the hiking cycle through Q1 of next year.
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 August 31, 2023.
Thanks for reading.
Let us know what you think.
And as always, be sure to download this week’s Bond Report!
