From the Desk of Ian Culley @IanCulley
Bonds are taking a breather as stocks recover.
Bond market volatility is cooling off as the banking collapses and the March Fed meeting fade from the front page.
And it appears the volatility has left big unresolved bases in US Treasuries in its wake…
Let’s dive in!
Check out the US 30-year T-Bond futures carving out a multi-month reversal pattern:
If and when it breaks above 132’18, I’m long with an upside objective of 143’00. Simple!
It’s the most attractive setup due to the bullish momentum regime and clean breakout level – two attributes short-duration bonds lack.
Volatility increases further down the curve as the bond market anticipates the Fed’s next move.
Check out the 10-year T-Note futures:
Price rocketed off year-to-date lows and through my risk level, only to post a potential failed breakout. Notice momentum remains in a bearish regime as the 14-day RSI failed to register >70.
If you’re directly trading these markets…
The path of least resistance is higher for the 10-year on a decisive close above 115’15. I’m long above that level, targeting 121’00. But only if it holds above my risk level.
If you don’t trade these markets, it’s still important to understand other long-duration assets, such as tech stocks, will likely experience a significant tailwind as bonds catch higher.
Bigger Picture: It’s more about potentially adding bonds to our portfolios after last year’s historic selloff. That’s a big shift that will impact all asset classes.
Let’s move further down the curve to the 5-year T-Note:
It appears similar to the 10-year. It never hit overbought conditions during the recent rally and failed to hold last week’s breakout.
Nevertheless, I believe bonds will eventually catch higher across the curve.
The 110’08 level marks my line in the sand for the 5-year. I’m targeting 114’00 if and only if it’s above that level.
Last but not least, the 2-year T-Note:
It best captures the recent volatility with wide-bodied bars over the past couple weeks. This reveals the unusually large intra-day trading ranges that have been taking place.
I like buying strength above 103’25, targeting 105’14. But my bias remains neutral until a decisive breakout.
Bonds across the curve are forming tradeable lows. If and when they resolve higher, other long-duration assets most likely follow suit. These assets include tech stocks and growth names, in general.
But it’s not that simple for the broader stock market. The S&P 500 fell 5.0% on the initial bullish thrust in bonds earlier this month.
On the flip side, the S&P 500 has recovered roughly 5.0% since March 13 as bonds began to simmer down.
While bond investors welcome any and all rebounds in US Treasuries, the stock market would prefer a steady and controlled climb over anything else.
Countdown to FOMC
After the recent 25bps increase, the market is pricing in a potential pause in the hiking cycle at the May 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 March 30, 2023.
Thanks for reading. As always, be sure to download this week’s Bond Report!