EC Have Bonds Broken To The Up Side?

Seen the yield curve recently? If so, you’ve surely noted the downward trajectory of Treasury rates over the past month.

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Notice the gap between the green and purple lines? As the coronavirus ran rampant over the past month, the 30-year T-bond yield sunk 20 points. That translated to better than a $6, or 4%, lift in the market price of the iShares 20+ Year Treasury Bond ETF (Nasdaq: TLT), pushing the ETF’s share value to test the upper bound of a consolidation area forming since April. 

On the daily chart, a decisive close above $171.29 would represent a breakout for the iShares fund. Well, we got a close above that level on Tuesday, just a tick below the day’s high of $171.58. Was that decisive? On the surface, not so much. It actually led to some backfilling in early Wednesday trading, causing some observers to remark that Tuesday’s market was largely dominated by profit-taking.

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Still, when you sift through the trades by volume, there are signs that new money flowed into TLT—nearly $17 million, in fact. That bolsters the breakout argument.

So, if there’s really been a breach of resistance, where does it lead? Technically, the initial upside target is the $186 level, a further 9% lift. Then, in the longer term, an objective of $193 is in sight.

So, with rates as low as they are now—the long bond yielded just 1.19% as of Tuesday’s close—it’s fair to ask if investors are still inclined to buy enough Treasury paper to push TLT higher.

The facts on the ground seem to indicate the answer is ‘yes.’ The obvious reason is that investors are so nervous they’re willing to accept meager yields because T-bonds are the safest of safe havens for their money. With a guaranteed return of face value at maturity, investors, many of them at least, buy Treasurys for capital preservation rather than yield. There is, of course, the impact of inflation to consider, but that’s a matter we’ll ponder later.

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