Which Way Are Interest Rates Heading?

JC Parets
December 17, 2018

Bonds Funds are breaking out to new 3-month highs. This comes after consensus this September was for higher US rates, and therefore, lower prices for bonds. When the market is leaning too much in any one direction, the unwind of that extreme positioning can be intense. That's what I believe has been happening throughout the 4th quarter.

Here are two charts that show rates could continue lower for some time. The first is a long-term chart of the US 10-year Yield failing to break out above the downtrend in place since 1981:

Notice how it could not hold above the 2014 highs. This is a lot of overhead supply (demand for bonds) that needs to be absorbed. Does the path of least resistance here appear to be higher or lower? Still seems lower to me.

Here are 30-year Yields. Look at that nasty failed breakout above the 2015-2018 highs, oof! If we're below 3.26%, there is no reason to be bearish 30-year treasury bonds:

Here is the setup. With the Bond ETF $TLT making multi-month highs, is this the beginning of a major squeeze? Or was that the major squeeze and now bonds come back as money rotates into stocks?

If we're above 119 in $TLT, then I think we need to err on the long side of bonds and expect further downside in stocks. Bonds failing up here would likely be more consistent with an environment that stocks are going higher. So I think this is a big one to watch.

JC

 

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