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%.
The increasing stress on credit markets culminated in the High-Yield $HYG versus US Treasuries $IEI ratio blowing out to its lowest 14-day RSI reading since September 2008:
US Treasuries are sticking a bullish reversal – an admirable feat following an unforgettable selloff.
If you aren’t buying bonds yet, it’s time to reconsider.
Here's the US T-Bond ETF $TLT trading above a rising 200-day moving average as it violates a multi-year downtrend line:
These are the early signs of a trend reversal.
Now, bond bulls want to witness the 14-week RSI post fresh multi-year highs. (We may see such a print following today’s action.)
Heading into the close, the 30-year T-bond is registering its largest one-week rate of change since spring 2020. And on a more tactical time frame, the 14-day RSI is reaching overbought conditions.
Yields on sovereign debt are chopping sideways across the globe.
The US, France, Germany, Spain, and UK benchmark rates are well below their respective 2023 peaks.
But in Japan, the JGB 10-year yield is hitting its highest level in over a decade.
Check out the Japan benchmark rate cruising above 100 basis points:
Earlier in the week, the Japan 10-year yield reached 1.10 for the first time since July 2011.
While the Bank of Canada, the Swiss National Bank, and the European Central Bank began cutting rates this year, the Bank of Japan (BoJ) may hike later this month.
You can blame it on a plummeting yen or the BoJ’s Yield Curve Control policies.
We have another bearish divergence calling strike three on the stock market rally…
High-yield bonds $HYG versus US Treasuries $IEI.
Check out the HYG/IEI ratio (dark blue line) overlaid with the S&P 500 ETF $SPY:
We use the HY bond-to-US Treasury ratio to track credit spreads. When the dark blue line falls, credit spreads widen – a sign of dwindling liquidity and stress for the bond market (the world’s largest market).
Stocks tend to struggle as credit spreads widen.
On the flip side, when these spreads contract (or the HYG/IEI ratio catches higher) stocks rally as capital flows into risk assets. That’s why these two lines trend together.
Notice the HYG/IEI ratio and SPY bottomed last October before rallying into the spring, following a similar path to new highs.
The Nasdaq is ripping to new all-time highs. NVIDIA’s market cap is surpassing the three-trillion-dollar mark. And US T-bonds are registering another buy signal.
But the market’s still a mess.
Just look at yesterday’s intraday reversal—a bullish reaction to inflation data in the morning, followed by a bearish reaction to the FOMC meeting in the afternoon. Investors are still trying to make sense of the mid-week hoopla.
Friday’s close (the most important data point of the week) will reveal critical information regarding market conviction heading into the weekend.
Meanwhile, you can track high-yield bonds for risk-on confirmation.
Check out the HY Bond ETF $HYG overlaid with the high beta-versus-low volatility ratio (using the $SPHB and $SPLV ETFs):
G7 central banks are cutting rates – first Canada and now the European Union.
Will the Federal Reserve follow suit in the coming months?
Investors seem to think so…
US 30-year T-bond futures have posted positive returns six days in a row – their longest winning streak since April last year.
T-bonds also broke above a key polarity zone, triggering our buy signals from last month:
I’ve made clear my disdain for buying treasuries, so the long bond trade will likely be a winner. After all, the best trades are often the hardest to take.
No matter how you slice it, bonds are stuck in a downtrend.
Perhaps bonds are carving out a tradeable low. If so, we have our levels to trade against. But price is falling away from our entry orders, heading in the opposite direction.
You just can’t buy long-dated U.S. Treasuries right now…
Check out the U.S. T-Bond ETF $TLT:
TLT is trading beneath a downward-sloping long-term (forty-week) moving average and a yearlong downtrend line. Long-term averages and trendlines epitomize the Keep It Simple Stupid (KISS) approach to trend analysis because they work.
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.