Treasury Near-Term Rally Over, RBS Says: Technical Analysis

Treasuries are poised to fall after the 2-year note yield dropped last week to a record low and the 10-year yield slid to the weakest level in 19 months, according to Royal Bank of Scotland Group Plc, citing technical analysis.

Gauges of price momentum on the benchmark 10-year note turned “bearish” on a weekly and daily basis on Aug. 27, indicating the near-term rally in U.S. debt is over, wrote William O’Donnell, managing director in Stamford, Connecticut, at RBS Securities Inc., in a research note today.

“A needed bull-market correction in Treasuries has begun,” wrote O’Donnell, whose firm is one of the 18 primary dealers that trade directly with the central bank. “The long-term trend for bonds is still bullish, but we need to flare out excesses in bullish sentiment and positioning to get to a more solid footing.”

The weekly 10-year note yield formed a “hammer bottom” on Aug. 27, a “classic” indication of an impending trend change, according to O’Donnell. On a candlestick chart, a hammer bottom has a thick, short upper segment atop a long, thin segment, resembling a hammer.

A “short term correction” will last from two to four weeks, he wrote. Investors should wait until the 10-year note yield climbs to 2.87 percent before beginning to buy again.

The yield fell 7 basis points, or 0.07 percentage point, to 2.57 percent, at 10:37 a.m. in New York, according to BGCantor Market Data. It increased 3 basis points last week after touching 2.4158 percent on Aug. 25, the lowest level since January 2009. The two-year note yield dropped 5 basis points to 0.51 percent after a record low of 0.4542 percent on Aug. 24.

Treasuries have returned 7.9 percent this year, according to Bank of America Merrill Lynch indexes, compared with a 4.9 percent drop in the Standard & Poor’s 500 Index.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

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