From the Desk of Ian Culley @IanCulley
“Sell the two… Utah! Sell the two!”
I’ve parroted my bond outlook during internal meetings and across our Slack channels in recent weeks, partly in jest but mostly to highlight the underlying uptrend in rates.
Honestly, I’m not crazy about selling the short end of the curve, though I believe there’s a trade there.
Instead, there are far better opportunities with longer-duration bonds.
Shorting bonds isn’t the most popular play with the Fed and the dollar and the CPI…
But that makes me like this trade even more, especially when I put the headlines and the dominant narrative aside and simply focus on the charts…
Check out the 10-year yield $TNX:
The US benchmark rate remains within a well-defined uptrend, resolving higher from one bullish continuation pattern after another. And it’s showing no signs of a trend reversal.
Could rates roll over later this year? Yes, absolutely! But I can only speak to what I see in the charts.
Based on the charts, I believe the 10-year hits 5.25% later this year – or perhaps early 2024.
The 5.25% level coincides with the June peaks from 2006 and 2007, making it a logical target for the next leg higher in rates.
If US Treasury yields continue to rise – and the market has yet to reveal a reason they won’t – bonds have nowhere to go but lower.
I don’t see why we shouldn’t entertain the idea.
Here’s the setup in the US 10-year T-Note:
The 10-year T-note is showing signs of renewed weakness after going nowhere since last fall.
It broke down from an eight-month channel while posting an oversold reading on the 14-day RSI earlier this month, indicating sellers remain in control.
I don’t like trading patterns with sloping boundaries or trendlines. Breakouts often tend to churn sideways, much like the 10-year T-note today.
Horizontal boundaries offer far better areas of defining risk. For the 10-year, that level coincides with the March lows at approximately 110’13.
If and when 10-year T-note futures undercut those former lows, I like it short toward a measured move at approximately 104’16.
Yes, this trade is far from triggering. But the 10-year isn’t a chart I want to buy. I tried buying bonds earlier in the year, and it didn’t work.
That’s valuable information!
Perhaps simply underweighting bonds makes sense for many investors. I get that.
Most importantly, this isn’t the place to buy bonds.
There are far better squeezes out there. If that’s the goal, the stock market is the place to go shopping – not the bond market.
Treasuries could catch higher, of course, but I’ll let the market prove it first.
Further weakness in US Treasuries is a real possibility every investor needs to have on their radar during the back half of the year.
Countdown to FOMC
The market is pricing in a 25-basis-point hike later this month following the recent decision to pause.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
Thanks for reading. As always, be sure to download this week’s Bond Report!