From the desk of Tom Bruni @BruniCharting
Last week I had the pleasure of being on Real Vision TV where I recorded two segments, one on Bonds and Equities pairs trade (short EWJ/SPY).
The video to the Equities trade is here, but since I’m not sure if/when the free video about Bonds will be out I wanted to go through that trade for you all on the blog. And if the video does come out, I’ll be sure to share it.
First let’s start off with the Benchmark 10-Year Yield that most investors look to when talking about Bonds. Rates bottomed in 2016 and were in a clear uptrend until the middle of last year when they tried to break out above 3.00% as momentum diverged. That proved to be a failed move, and got us very bullish on Bonds for the first time in a long time.
Click on chart to enlarge view.
But it’s not just a US Story. Rates across the developed world have consolidated near their 2018 lows for some time, but are rolling over again. If Rates all around the world are falling, we expect the US to follow suit.
Flows into more defensive sectors of the market continue, with Utilities making new all-time highs and US REITs now joining the party. Additionally we continue to see strength out of “Low Volatility” and “High Dividend” factors both on an absolute and relative basis. Bond market participants need to get yield somewhere, and they’re doing it in these sectors.
So that brings us to the vehicle we’re going to use to take advantage of lower rates going forward. Here’s the 20+ Year Treasury Bond ETF $TLT, which has formed a nice base (or “Inverse head & Shoulders” for you pattern fans) over the last year and is now back toward the top of its range.
What I like about this trade the most is that our risk is very well-defined. This thesis is only valid if prices break above 123. Below that, there’s no reason to be long and a neutral approach is best.
If we do get that breakout, it targets 130 over the intermediate-term (or the equivalent of ~2.05% on the 10-Year Yield).
Tomorrow is our US Conference Call where we’ll talk more about Rates and the other themes and opportunities we’re seeing all over the world.
We hope you can join us.
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Thanks for reading and let us know if you have any questions!