Bonds: A Buying Opportunity

In our last update, [see: Update on Bonds – Jan 28, 2018] we noted that 10Y price (121’265) was closing in on the bottom of a shallow, falling channel as yields were approaching what most pundits seemed to consider a line in the sand. We saw things differently.

The closest [line in the sand] would correspond with the bottom of the shallow falling white channel – currently around 121’015 on ZN. In a perfect world, this might correspond with the rising red channel midline for TNX — about where the .382 Fib is at 28.56.But, ZN’s white channel is likely to break down, meaning support is way down at the rising yellow channel bottom. If it waits until October, it would intersect with the .500 Fib at 119’180.

If it happens sooner, ideally late April, it would drop through the .500 Fib and intersect with a falling wedge at around 118’300 – thus enabling TNX to reach 30.

As it turned out, TNX overshot 28.56 and slightly exceeded 30, reaching 30.35 on Wednesday as ZN reached 118’310.

Amid the cries of alarm, I remain convinced that rates will moderate from here and that prices have most likely bottomed. I never thought I would say it, but the 10Y is probably a smart buy at 3% — at least in the near-term.As is so often the case, there are some important caveats.

continued for members…

First, remember there are two potential channels to consider. The yellow one is a lousy fit in many ways. But, the white one isn’t much better. Sure, its midline fits better, but the top doesn’t, and neither does the bottom (with Fibs, at least.)As we discussed earlier this morning, DXY has reached the top of its large falling channel, EURUSD has bottomed on a rising channel, TNX has reversed off a slight overshoot and GC has bottomed on a rising channel. If we get the bounce I expect, I’d look for ZN to test the white channel bottom at 120’280, followed by the falling wedge top around 124’050. I would also keep an eye on it around the .500 Fib at 119’180 and the .382 at 123’100.

If it drops through 118’300, then it’s likely headed for the white channel – currently around 117’100ish.Rarely do all the stars align like this. So, it raises my confidence level quite a bit. It also suggests a substantial sell-off in equities over the next couple of weeks.

Beware that very long-term weekly channels like the yellow one are subject to slightly placement errors. So, we could be early. Also, be aware that a drop through the yellow channel bottom to the white bottom or lower would be bullish for equities, and not so great for long bond positions. As always, use stops judiciously.

And, the biggest risk of all: the Fed loses control and rates break out. I usually chart in log scale, but the arithmatic chart for TNX illustrates just how critical current levels on the 10Y are.