The CBOE 10 Year Treasury Note Yield (TNX) hit a four-month high on Thursday, while the iShares 20+ Year Treasury Bond Fund (TLT) fell to a four-month low, adding to speculation that the US economy is heading towards higher interest rates and inflation. The financial media picked up on this theme, proclaiming that the bond market is “waking up” to additional stimulus spending, whether it happens now or after the election.
Key points to remember
- The 10-year yield posted an all-time low in August and reversed.
- The 30-year bond hit a record high in August and reversed.
- Both instruments have to overcome major hurdles to confirm trend changes.
- Observant market participants will observe 0.95% on the 10-year yield and $ 150 on the bond fund.
The 10-year yield posted an all-time low in August and has risen since then, closing at 0.848% on Thursday, but resistance from the 200-day exponential moving average (EMA) will kick in when the rise hits 0.915%. . On the flip side, the bond fund just broke through this support level, closing below the moving average for the first time since March 2019. Short-term price action can be instructive in this regard as a reversal and a strong recovery followed this decline.
The most likely scenario for the bond market by 2021 is threefold. First, returns increase on the assumption that billions of billions are poured into the US economy. Second, that momentum wears off quickly because it is already discounted by bond traders. Third and most importantly, the bond market then draws its indices from economic statistics, which in turn will be driven by the lingering impact of COVID-19 and the tone set by the next administration.
yield refers to the income generated and realized on an investment over a given period. It is expressed as a percentage based on the amount invested, the current market value or the face value of the security. It includes interest earned or dividends received from holding a particular security.
Monthly Treasury yield graph (1981-2020)
The instrument posted an all-time high of 15.84% in 1981 and entered a historic downtrend, digging more than 20 years of highs and lows lower in 2012, when it hit a near low. by 1.50%. Yields then relaxed into a wide rectangular pattern, limited by the bottom and resistance at 3.00%. Price action tested the resistance of the 200-month EMA for the first time in 14 years in 2018 and reversed, settling in support for the third time in 2019.
Yields collapsed in the first quarter of 2020, dropping to an all-time low of 0.40% in March, and entered a narrow trading range with short-term resistance at 0.96%. A descending trendline from the highs falls at this level, which has also aligned with the resistance of the 200-day EMA. As a result, a strong positive catalyst may be needed to move up this barrier and move towards a much stronger eight-year breaking strength near 1.50%.
Monthly bond fund chart (2002-2020)
The bond fund traded in a 17 point range between 2002 and 2008, when it erupted in response to the developing economic collapse. The rally peaked at $ 123 by the end of the year and turned in line, failing in the new decade. A subsequent rise in 2012 posted a new high at $ 132, marking the second point in an ascending trendline that ended the rallies in 2015, 2016 and 2019. The pandemic has caused a breakout above this formidable barrier in the first quarter of 2020, hitting an all-time high near $ 180 in March.
A massive selloff in June ended at the breakout support and Fibonacci’s .382 rally retracement level, giving a rebound that posted a higher low in August. The fund has been losing altitude since then, closing below the 200-day EMA on Thursday. In turn, it looks like the stage is now ready for a second test with major support near $ 153. Round that up, and common sense dictates that it will take a drop of $ 150 to confirm a failed breakout that exposes much lower levels.
A retracement refers to the temporary reversal of an overall trend in the price of a stock. Distinct from a reversal, retracements are periods of short-term movement against a trend, followed by a return to the previous trend.
The bottom line
Yields rise as bonds lose ground, but the dominant trends in 2020 will remain in effect until these instruments break through the major hurdles.
Disclosure: The author did not hold any position in the above titles at the time of publication.