The current market environment is creating a unique opportunity for bonds.
With the charts signaling strong potential for gains into year-end, now is the moment to take action and add some bond exposure to your portfolio.
With some big reversals underway, the timing couldn’t be better to capitalize on these new trends.
Not only are we seeing a growing list of base breakouts for treasuries, corporate bonds, and bond ETFs, but the intermarket landscape is turning increasingly favorable for fixed income in general.
Let’s jump in and discuss why we’re buying bonds here and how we want to express this thesis.
The fed is giving us a clear indication these days that we’ve seen the peak in interest rates for now. The odds of a rate cut at the September meeting in a few weeks are at 67.5%.
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of August 29, 2024.
In this kind of late-cycle environment, it is ordinary for the yield curve to come out of inversion as interest rates come down.
The chart above shows the 2s/10s curve moving back toward positive territory for the first time in over two years.
While this isn’t always immediately bearish for stocks, it is undeniably bullish for bonds.
We’ve overlaid the 7-10 Year Treasury Bond ETF $IEF to show the impressive performance from bonds when the 2s/10s curve has uninverted during past cycles.
We had a signal in 2007 right around the same time bonds kicked off a massive multi-year rally.
It also happened in 2019 just before a fierce leg higher for bonds. This was capped off with a huge momentum surge through the pandemic-related volatility.
The point I am making is that while it might be a rare signal, it is one we have seen work over and again in recent decades.
Beyond just interest rates, a weak dollar is also supporting a move higher in bonds these days.
Here’s the Dollar Index $DXY breaking back below some key prior-cycle highs:
Monetary easing is lowering interest rates, weakening the dollar, and making bonds a more favorable strategic choice.
With monetary easing lowering interest rates and concerns over currency depreciation rising, bonds present a strategic advantage in this market phase. The dollar is steadily losing strength. As we emerge from the inversion, we see the front end of the curve (like 2-year bonds) moving first, with the long end (30-year bonds) following later.
While all of this intermarket action is great for bonds, at the end of the day, it’s all about the chart.
Here’s a look at IEF flirting with new 52-week highs as it looks to complete a textbook primary trend reversal.
We want to lean into the short end to express our bullish bond thesis for now as that is where the leadership is.
As long as treasury spreads are moving higher, this is likely to remain the case.
IEF reached our initial target of 96, and we believe it has the potential to keep going. We like it above 96.50, with a target of 102. Over a longer timeframe, we’re looking at a secondary target just north of 110.
This is our treasury market vehicle for now. I have a feeling we’ll be out with new trades on more of them in the future.
We also like high yields and corporate bonds. We outlined some trades last week you can read here.
The story is simple…
With monetary easing lowering interest rates and concerns over currency depreciation rising, bonds are a good place to be right now.
Most importantly, the charts are signaling a clear message: Buy!
-Allstarcharts Team
Thanks for reading.
As always, be sure to download this week’s Bond Report!
