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The Bond Column

Weekly Review
Updated: 2016-04-18, 08:55:37 ET
Analyst: David Kelland

This week was a disappointingone for U.S. economic data with PPI, CPI, retail sales, and industrial productionall missing estimates for March. April's Michigan Sentiment reading was alsoworse than expected although the Empire State manufacturing index for thismonth did show solid improvement. Treasury yields moved mostly higher along withstocks while the yield curve flattened. The 30-year yield was even for theweek while the 5-year yield climbed five basis points.

Global equities generally ignored all of thatdata and ripped higher on Wednesday after a big jump in Chinese imports andexports was reported for March. The report fanned investor hopes that fiscal and monetarystimulus in the Middle Kingdom may be starting to take effect. China's GDPdata, released on Friday, showed a positive surprise for Q1 growth but alsoindicated that the growth was highly credit-intensive, meaning unsustainable in thelong term.

From the March 15th closes (the day before the FOMC rate decision), the 5, 10, and 30-year Treasuryyields have moved down by 28, 21, and 16 basis points, respectively. That isexactly the kind of curve-steepening rally one should have expected from the dovishmessage that the dot plots and Fed Chair Yellen conveyed to investors. Over thesame period, the S&P 500 has rallied 77 points (3.8%)

  • 30-Year Yield (Daily): The 30-year yieldfound resistance at the 2.619% level on Thursday, where the 21 and 50-daymoving averages coincide with the 61.8% Fibonacci retracement of the January-June2015 move up in yield. It was also the low in the August 2015 market panic. Sincethe trend in the 30-year yield is down, there appears to be room foracceleration here in the bond, particularly if stocks turn lower. On theother hand, the move lower in yield (higher in prices) also looks like it isstruggling to take out old lows (green up arrows). The economic data for March was quite poor and the bond auction on Thursday garnered the second-highest bid-to-cover ratio on record. With that news flow, one could have expected the bond yield to have fallen much further than it has. Of course, stocks have been a one way train higher and that may be keeping the Treasury bulls in check. In any event, a move above 2.619% could bea good entry point for a short with a tight stop.

  • 10-Year Yield (Daily): The chart of the 10-year yield is even more bearish than that of the 30-year yield because the former made a four-year low in February. The 10-year yield didn't quite reach resistance at its 21 and 50-day moving averages on Thursday, but it did sell from the speculative downtrend (the steeper one) around 1.802%. If the yield needs to go lower, this is as good an opportunity as any. Above 1.78%, I would start questioning the wisdom of being long and above 1.81% I would not want to own 10-years . Again, the 10-year appears to have relative strength to the long bond.

- David Kelland, Briefing.com