From the Desk of Ian Culley @IanCulley

Fed Chair Jerome Powell continues to rule the markets with an iron fist, mercilessly punishing any who doubt his supreme will. 

Or maybe I should stop daydreaming at my desk. 

Either way, this little fantasy is a helluva lot more entertaining than the monotonous uptrend in US Treasury yields. 

But I’ve found boredom – when not taken seriously – can lead to neglect.

That’s where process steps in to save the day. 

It’s hard for the market to catch us off guard if we’re constantly reviewing the charts.

And these next two bond charts demand our full attention…

First, the High Yield Bond ETF $HYG relative to the US Treasury Bond ETF $IEI: 

From the Desk of Ian Culley @IanCulley

The FOMC stuck to its script this week, kicking the can and keeping rates steady.

Everyone was expecting the news. But the market wasn’t expecting Fed Chairman Jerome Powell (the man, the myth, the legend) to completely dash its hopes of a March cut. 

Strangely enough, rates continue to fall on the news – even as markets adjust to the possibility of the initial rate cut now coming in May.

Before you run out to buy US treasury bonds, check out the overlay chart of the US 2- and 30-year yields:

There’s a big difference.

The 2-year yield is churning sideways, reflecting the market’s expectations of the FOMC’s next move – nothing in the foreseeable future.

From the Desk of Ian Culley @IanCulley

High-yield bonds are printing fresh highs relative to US Treasuries – signs of a healthy risk appetite. 

Bond market volatility is collapsing, allowing equities to take center stage. 

And interest rates are trending lower since peaking last October.

But looking ahead to next month, we could see rates correct higher.

The US 10-year yield tends to rise in February – more so than any other month of the year except April:

It would make sense for this seasonal trend to continue.

The 10-year yield dropped more than 100 basis points during Q4 last year. 

From the Desk of Ian Culley @IanCulley

Inflation is proving sticky.

So what?

Stocks remain buoyant.

And bonds – the largest market in the world – continue to reveal a risk-on environment.

High-yield bonds relative to Treasuries measure risky junk bonds' performance versus the safest fixed-income asset, US Treasury bonds. 

The key characteristics of these assets create a critical risk gauge for bond and equity markets, as risk-seeking behavior in the bond market also bodes well for risk assets.

Check out the High Yield versus US Treasury Bond ratio ($HYG/$IEI):

From the Desk of Ian Culley @IanCulley

US treasuries finished 2023 with a bang, hitting our initial targets before Christmas.

But the long-bond trade is losing its luster.

Resistance is now coming into play as the bond market catches its breath…

Check out the US Treasury Bond ETF $TLT with a 200-day simple moving average:

I’m not a big fan of moving averages. I don’t like how they distract from price and create extra noise on the charts.

Regardless, many market participants track the long-term moving average. Bond bulls are shouting their battle cries as TLT peaks its head back above the 200-day mark.  

So, is it time to get long bonds?

No!   

From the Desk of Ian Culley @IanCulley

JC asked me how far I thought interest rates would pull back during a recent internal meeting.

The question caught me off guard since I trade bonds, not interest rates. I know my bond trade targets off the top of my head, but not the corresponding rate levels. 

As soon as the call ended, I applied Fibonacci analysis to the 30- and 10-year yields…

The 3.50 level marks a logical area for the 30-year yield to stop falling.

That level coincides with a shelf of former lows and a critical retracement level covering the rally off the 2020 low.

The similar level for the 10-year yield stands at 3.25:

From the Desk of Ian Culley @IanCulley

Last month’s bond rally has legs.

Long-duration bonds have gone from printing multi-month highs to reclaiming their March pivot lows in just a few weeks.

So, let’s revisit our recent swing trades as they continue to run...

Thirty-year T-bond futures sliced through our initial target of 122:

Luckily, a completed bull flag provides a precise level to define our risk.

We can take another long position in T-bond futures, targeting 134, but only if it holds above 124’09.

Here's a look through the equities market…

The long-duration bond ETF $TLT is on the verge of reclaiming a critical shelf of former lows:

From the Desk of Ian Culley @IanCulley

The bond market is turning the page. 

Our long US Treasury trades are finally working. And investors are reaching for high-yield debt.

On the surface, it’s a positive shift for the hardest-hit markets in 2022. 

But it also sends a clear message to stock market investors…

Buy!

Credit spreads are contracting as the iShares High Yield Corporate Bond ETF $HYG trades at fresh 52-week highs relative to the iShares 3-7yr Treasury Bond ETF $IEI:

It’s classic bull market behavior.

But that’s not all…

The newest junk bonds to hit the street are catching higher on an absolute basis. 

Check out the Fallen Angel High Yield Bond ETF $ANGL:

Credit spreads have tightened a good deal since October.

I can't help but think this is just more classic bull market behavior.

As the major US equity indices have been rallying into year end, we've seen confirmation out of a number of credit ratios we track to gauge risk appetite within fixed income markets. Specifically, the the iShares High Yield Corporate Bond ETF $HYG is trading at 52-week highs relative to the iShares 3-7yr Treasury Bond ETF $IEI.

This ratio ultimately gives us an inverted chart of credit spreads. Check it out:

Notice how both the S&P 500 and the HYG/IEI ratio are pressing back through their summer highs. 

It's hard to have a bull market in equities if the bond market is positioning defensively. Think about it; the players in the market with the deepest pockets require an incredible amount of liquidity.

From the Desk of Ian Culley @IanCulley

Bond investors must feel like it’s their lucky day.

Long-duration bonds are reaching new multi-month highs!

It finally looks as if a tactical bounce is underway for these safe havens-turned-risk assets…

The Treasury Bond ETF $TLT is coming off extreme oversold readings on the 14-day RSI, highlighted in the lower pane:

Over the past two years, oversold conditions at these levels have coincided with near-term bottoms for long-duration bonds.

Based on the chart, TLT looks poised for a mean-reverting rally.

Let’s zoom in…

Check out the daily chart carving out a potential six-week reversal formation:

From the Desk of Ian Culley @IanCulley

What a wild broad-market reversal yesterday!

Powell supposedly stated the obvious or blurted out what was on everyone’s mind. I don’t know. I haven’t watched the video or reviewed yesterday’s treasury auction. 

And I won’t.

I’m more interested in the “what,” not the “why,” as the former has proven far more valuable for navigating markets.

Nevertheless, the message is clear: no one wants to buy bonds. 

It makes sense to me…

Check out 30-year T-Bond futures:

Long-duration bonds are in a clear downtrend, stair-stepping lower.

From the Desk of Ian Culley @IanCulley

The market barely reacted Wednesday afternoon following Powell’s remarks, cooking up a big, fat nothing burger for investors.

Market participants took the decision to leave rates untouched in stride. After all, the pause in the hiking cycle was the expected outcome. Since investors already pegged the Fed, the valuable information hung on Powell’s words or forward guidance.

Yet judging by today’s performance, it appears the market just needed a little time to marinate. 

Yesterday’s failed reaction has given way to a delayed response as long-duration bonds scream higher. 

But before we get ahead of ourselves and rush out to buy the bond market bottom, let’s check the charts…

First, the monthly 10-year T-note chart: