Update on Bonds: Dec 26, 2018

When we last focused on bonds back in October [see: Plan B] we noted that 2s10s spreads were collapsing and 10Y prices (ZN) had reached important support.

Now that yields have broken out and prices and spreads have broken down, we’re already beginning to see the effects on the market and the broader economy.  Bottom line, they aren’t good.

This followed a supposed “breakout” in yields that we never bought.  Even as nearly everyone around us called for 3.5 – 4% yields, we saw them falling from 3.24% back to our 2.85% target — which is exactly what happened.

Since then, ZN has rallied sharply, reaching our 121 target last week and threatening higher.  And, 10Y yields have broken below a trend line dating back to July 2016.We’ll take a look at the road ahead.

continued for members

As we noted last week, the top of the purple falling wedge is also the midline of a falling (gray) channel — providing a potential breakout in price with solid, potential targets.

Looking at the bigger picture, we can see that ZN is also backtesting a flat, gray flag pattern dating back to 2012.  When it broke down earlier this year, it opened the door to a tag of the large, white channel bottom.

Meanwhile, the breakdown in yields provides solid potential lower targets, with the falling yellow channel .786 at 2.492 looking like the first important test.If it fails, as expected, there are many lower targets that come into play.The price chart provides some targets that fit: 123 for the 2.498 target, 127 for the 2.172 target. The chart below shows potential timing via a recently added falling white channel.Obviously, the above requires yields to continue breaking down and price to break out — a scenario I’ve favored for a long time.  I have never bought into the idea of yields breaking out, simply because I don’t believe the Fed would allow it.  It would be much too onerous from a budget standpoint.

What about the impact on stocks? 


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