Bonds Trigger a Tactical Buy

From the Desk of Ian Culley @IanCulley

Rates are rolling over… 

And bonds are catching a bid.

After four months of steady selling pressure, US Treasuries are finally carving out a tradeable low.

Let’s take a look!

Regardless of duration, the following bond charts present an identical tactical approach.

Two key themes dominate these trade setups: entry points designated by price reclaiming the February 2024 lows and initial targets set at the December 2023 highs.

Of course, there’s always an exception…

Check out the US 30-year T-bond futures:

Like the following charts, we can measure our risk at a key pivot low from late February.

I like buying T-bond futures against 117’27. But instead of targeting the December 27th high of 125’30, I prefer to aim at a critical shelf of former lows at approximately 122’30.

If and when price manages to close above those former lows (last year’s March and July Troughs), we can adjust our objective to the late 2023 high.

Let’s approach these bond trades with a shorter-term mindset until the market suggests otherwise.

Here are the corresponding levels for the T-bond ETF $TLT:

We can swing at TLT if it trades above 92, targeting 99.

The 10-year T-note posted a decisive breakout yesterday:

Our entry-level coincides with the February 22nd close of 109’17.

If the 10-year is above that tactical polarity zone, we’re long with targets of 113’06 and 117’00 over more extended time frames.

The 93.40 level marks our line in the sand for the T-note ETF $IEF:

IEF also triggered a buy signal yesterday with an initial target of 96.25 and a secondary objective of  100.

Next up is perhaps my favorite chart today: 5-year T-note futures:

The 5-year offers the cleanest level with the most price memory to trade against – a critical shelf of former lows dating back to the October 2022 pivot low. 

I like buying the 5-year note on strength above 106’10,  targeting 109’00.

But the 5-year T-note futures will likely experience a muted rally relative to longer-duration treasuries such as the 10- and 30-year futures. If you're looking for a little juice, you might want to stick to the longer-term bonds.  

Either way, these are the levels for the US Treasury ETF $IEI:

We can take a long position on a decisive close above 115.25 with an upside objective of 117.50.

Bigger picture: US Treasuries remain in a structural downtrend.

But with interest rates falling and well-defined levels to trade against, you could catch a bond market bounce.   

Are you taking a swing at Treasuries?

If so, what’s your favorite trade?

–Ian

Countdown to FOMC

The market is repricing the probability of the first 25-basis-point rate cut to the September 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 May 16, 2024.

Thanks for reading.

Let us know what you think.

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