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The Bond Column

Technical Perspective on 3-Week Rally
Updated: 2015-03-30, 08:55:48 ET
Analyst: David Kelland

After a very volatile past 4 months in the Treasury complex, it makes sense for us to take stock of where some of the different instruments are and to try to identify some positive risk/reward situations based upon the charts.

In February, we took the view, rather quickly I might add, that what had happened from mid-September until the end of January had been an extraordinary move higher in 10's and 30's. There was some fundamental basis for that rally, particularly the disinflationary pressure from collapsing oil prices and continued sluggish wage growth in the U.S. But, some of this move was also based on market positioning because sentiment had been so negative in the bond market for a variety of reasons. Those reasons include the high yields available from dividend paying stocks, generally high equity returns, some theories of the money supply that assume quantitative easing will lead to high inflation, and a general expectation that interest rates and inflation are mean-reverting.

As the market traded lower in February, we welcomed the declines as healthy and necessary. While we were not very optimistic at the low (the day of the release of February's employment report), we were also not negative on Treasuries as they bounced, recognizing that a 13-basis point, one-day rise in the 10-year note at least has the potential to be capitulative. In hindsight, we should have been more bullish.

Now we have dropped 43 basis points, high to low, in the 30-year bond, and 41 basis points in the 10-year note, high to low. Those moves happened in 14 days, helped along by a massive buying response to the FOMC statement on Wednesday, March 19th.

The 10-year yield (pictured below) bottomed at its October low and the bottom of our channel, drawn in red. There is potential for an inverse head and shoulders pattern, although it is anything but a sure thing, given how quickly we came back down. This seems like a wait-and-see market for long-term positioning. There is still the red channel that can be range-traded. 

10-Year Yield Daily Chart:

The 30-year yield (pictured below) shows behavior similar to the 10-year's, except the yield's trend down has been stronger, and the 30-year yield is now well below its October low. This is not encouraging to sellers of 30-years, but one does often see a retest of two old levels (highs or lows) where the third extreme is made somewhere in between. What is encouraging for bears, however, is that it is holding the 61.8% retracement of the move from January 31st to March 6th (2.472%). That is a Fibonacci level that some technical analysts deem significant (support, in this case). A move back above 2.549% might be a place to sell some bonds, given that we would be back in the channel (pictured in red) and that there is potential for some meandering in the middle of this year's range before the market decides if January 31st was a longer term high or not. Below 2.55%, long or out seem to be the only options. 

30-Year Yield Daily Chart:

David Kelland,