The 2 Most Important Bond Market Charts
Jay Kaeppel | Dec 13, 2018 11:19PM ET
A funny thing happened on the way that bond bear market. But first the promised charts:
*Figure 1 strongly suggests that the next major move in bond yields is higher (as yields tend to move in roughly 30-year up and 30-year down waves).
Figure 1 – 60-year bond yield cycle (Courtesy: www.mcoscillator.com)
*Figure 2 displays the 10-year treasury note yield – with a long, long downtrend followed by an advance to a potential “fake out breakout” to the upside. More to follow.
Figure 2 – 10-year treasury yields (x10); ticker TNX (Courtesy AIQ TradingExpert)
Now for the recap:
*The 10-year treasury yield (TNX) topped out in the early 1980’s and declined to a low in July 2012.
*TNX then moved higher for about a year, then drifted lower to its ultimate low around 1.35 three years later in 2016.
*From there rates rose to roughly 3.25% by October 2018. Along the way it took out its 120-month moving average, a horizontal resistance line at about 3.04% and finally a downward sloping trend line in October 2018.
*With “final resistance” pierced many bond market prognosticators assumed that yields were off to the races.
*And then that “funny thing” happened. 10-year yields fell from 3.25% in October to a recent level of roughly 2.90%.
At this point “predicting” where TNX is headed in the short run from here is pure conjecture. There is a chance that rates will not rally anytime soon and that they may even continue to drift back lower. Take your pick. Flip a coin. Whatever. The bottom line is that what you see in Figure 2 is entirely in “the eye of the beholder.”
So let’s circle back to Figure 1. The bottom line is this:
*The odds appear very good that the next 30 years in in bond yield will look a lot different than the last 30 years, when high grade bond yield fell from 15% to roughly 3% (which is OK, because if rates ever go negative and I have to pay the government just to hold my money I am going to be really pissed….but I digress).
Get The News You Want
*Short-term “traders” can trade long-term bonds to their hearts content. However, “investors” may be wise to avoid long-term bonds. Consider ticker TLT, the iShares 20+ year treasury bond ETF. It presently has a 30-day SEC yield of 3.06% and an “average duration” of 17.42 years. Here is how to understand that:
–Regarding yield, if price remained completely unchanged, and investor would theoretically earn roughly 3.06% in interest over the next 12 months
–Regarding duration, if interest rates rose one full percentage point, ticker TLT would theoretically lose -17.42% in value
Long-term bonds may rally from time to time. However, for long-term investors holding bonds, this is NOT a favorable reward-to-risk tradeoff.
Summary
In the “big picture” we probably are in a long-term bear market for bonds. But it may not look like it for a while. So trade in and out as much as you’d like. But for bond investment purposes I am keeping duration short.
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