10-Year T-Yield Breaks Crucial Support, TLT Overbought Near Term

The 10-year T-yield not only lost a rising trend line from July 2016 but also decade-old support at 2.62 percent. TLT has been on a tear, but is overbought; digestion of the recent gains is the path of least resistance.

 

When early October last year the 10-year Treasury rate hit 3.25 percent, bond bears increasingly felt vindicated. This was the highest level since bottoming at 1.34 percent in July 2016. Along the way, in April last year the 10-year broke out of a three-decade-old descending channel.

By late September, non-commercials had built record net shorts in 10-year note futures – 756,316 contracts (Chart 1). It was becoming a crowded trade.

 

From that October high, rates then came under pressure for three weeks, before once again rising to 3.24 percent by Early November. Then the bottom fell.  By then, non-commercials had already been actively cutting back. By early January, these notes were yielding 2.55 percent. For the first two and a half months this year, the 10-year rate (2.41 percent) remained range-bound between 2.62 percent, which goes back a decade, and 2.8 percent. Mid-March, bond bears could no longer defend 2.62 percent, followed by a quick drop to last Wednesday’s intraday low of 2.36 percent.

The loss of 2.62 percent preceded mid-December loss of a rising trend line from the July 2016 low (arrow in Chart 2). The two-year has suffered technical damage and could eventually head toward two percent. With that said, bond bears have an opportunity to stabilize matters here. The daily is way oversold. Last Thursday flashed a spinning top. Support around that session’s low goes back eight-plus years. Friday saw another spinning top. Shorter-term moving averages are still falling, so damage-repair can take time. In the best of circumstances, breakdown retest of 2.62 percent is the ideal scenario for bond bears.

 

The Fed lent a helping hand in loss of that crucial support. The FOMC met on March 19-20, holding interest rates steady at 225-250 basis points. This was expected, but not the dovish turn it took, which was much sharper than markets expected.  The bank now expects no hike this year. Last December, when it last raised, the FOMC dot plot expected two rate increases this year. That was the ninth 25-basis-point increase since the Fed began raising rates three years ago. Concurrently, the Fed plans to end the ongoing balance-sheet wind-down in September.  It began to run it down in October 2017. Currently, up to $60 billion a month can roll off. As of Wednesday, System Open Market Account (SOMA) holdings stood at $3.75 trillion, down from a peak of $4.24 trillion in April 2017. Prior to three iterations of QE, these holdings were $500 billion.

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