U.S. Treasuries Are Calling The Fed's Bluff
Tim Knight | May 17, 2016 12:54AM ET
The 10-, 20-, and 30-year US Treasury bonds are all in the final stage of what appears to be textbook cup-and-handle consolidation patterns.
Just in case you don’t know, cup-and-handle patterns are one of the most tried and true bullish consolidation patterns out there.
So first, here are the charts:
To be clear, the cup-and-handle pattern is not “in play” until the asset (in this case, the bond) closes above the highest portion of the pattern. There is some debate on when prices actually “break out” from this pattern, but needless to say, you’re safest if you wait for new weekly highs on the close.
So what does it mean that US Treasuries are sporting bullish price patterns? Well for one, it means that investors appear to be gobbling up bonds in spite of the fact that yields are literally at historic lows.
Not that you need reminding, but here’s a long-term chart of the 30-year yield from the St. Louis Fed’s own website (I’m not sure why there’s a gap shown on the chart – I assume it’s just a technical glitch):
So the Treasury complex is on the verge of bullish price breakout, which means, if it happens, that yields will fall even further. OK, so what?
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Well, keep in mind that bonds, and especially US Treasuries, are the “safe haven” investment. In theory, the US can never default on its debt obligations since it can simply “print” more money to service its debt. That’s one of the privileges of being the world’s reserve currency.
There’s a reason the US 10-year bond is used as the de facto “risk free” rate when evaluating investment return alternatives. The phrase “risk free” is code for “low returns” relative to other investment options. Think of the old saying, “No risk, no reward.”
Investors today, more so than any time in the last 40 years, would rather take no risk and reap no reward than invest in other higher-risk assets (ie. stocks, real estate, etc.). What does that really say about the state of our economy?
As we sit here today, all three bond charts posted above are still “mid-consolidation.” There is a chance that all three will turn out to be bull traps and reverse lower, thus sending bond yields higher and negating the cup-and-handle formations. I think that is unlikely, and I fully expect to see these charts break higher, sending Treasury yields to levels not seen since the 1950s.
To me, US Treasuries are calling the Fed’s bluff on interest rate hikes later this year.
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