Rates Diverge With Equities – TLT Pushes Through Aug ’19 Falling Trendline

The year is quite young, but things have not quite turned out the way bond bears were hoping they would. The 10-year T-yield last week pierced through trend-line support from last September. In due course, this likely opens the door to a test of 1.43 percent, which was a low from that month.


Early September last year, the 10-year Treasury yield (1.68 percent) dropped to an intraday low of 1.43 percent before rising. This essentially was a successful retest of 1.34 percent set in July 2016 and of 1.39 percent four years before that. After the July 2016 trough, rates rallied all the way to 3.25 percent by October 2018 (arrow in Chart 1), briefly breaking out of a three-decade-old descending channel. The uptrend did not last. The bull market in bonds was not quite dead yet. The drop since brought the 10-year rate to the September low last year.

On the way to that low, several support zones were compromised, most prominently 2.62 percent and then two percent. The latter persistently resisted rally attempts the past four months – or, to be specific, since the September low. At the same time, rates made higher lows, giving bond bears (on price) hopes that this would eventually result in a breakout. The opposite has happened. Last week, the 10-year yield lost a rising trend line from that September low. Increasingly, it feels like rates in months to come would be retesting that low.


This scenario is not out of the question particularly considering how non-commercials are positioned in the futures market. In the week to last Tuesday, they added 78,959 contracts to their existing cache of net shorts in 10-year note futures totaling 302,352 – a 20-week high (Chart 2).

In the last week of September 2018, just when the 10-year yield was in the process of peaking, these traders had accumulated 756,316 contracts – a record. This overzealous bearishness laid the foundation for the sustained drop in rates that followed as these traders were forced to cover. This time around, they are not nearly as bearish. Still, holdings remain sizable and can play a role in pushing the yield lower – provided they begin to cover.

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