Charts Suggest to Sell Treasuries in May and Go Away

  • 10-year yields have some way to go before meeting resistance
  • Yield curve has scope to steepen on a mean reversion

Do Ultra-Long Bonds Make Absolute Sense?

Last month’s rally in U.S. bonds notwithstanding, bears remain in control of the market, chart patterns show.

Renewed pessimism is seen across the spectrum of assets ranging from 10- to 30-year notes, which points to a steeper yield curve, specially as the market positioning clears out after the biggest short unwind on record.

March Retracement

Yields on 10-year bonds may continue to rise toward 2.43 percent -- the 100-day moving-average that serves as resistance -- where a new round of consolidation may ensue. Momentum studies endorse the uptick in yields, with the nine-day RSI climbing above the neutral 50-mark this week. Last week’s unfilled gap serves a reminder that bears carry strong resolve, even as the move higher in yield remains so far a retracement of the decline since from mid-March.

  • Yield resistance at 2.39 percent (interim), 2.42 percent-2.43 percent and then 2.45 percent
  • Support at 2.28 percent and 2.26 percent-2.25 percent

Negative Momentum

The daily chart on the futures contract that tracks 30-year bonds is signaling downside risks in the short term, with the current wave of negative momentum seen extending toward support at 150-04, which is the 100-day moving average. Momentum tools are trending lower and are far from oversold extremes, a technical configuration that bodes well for short-duration participants.

Following Treasury Secretary Steven Mnuchin’s comments this week on a possible sale of ultra-long bonds, yields on longer-term Treasuries jumped, with those on 30-year notes rising by the most since Jan. 18, to reach 3.02 percent.

  • Generic contract support at 150-26 (55-day moving-average), 150-04 and 149-16 
  • Generic contract resistance at 153-06 and 153-22

Mean Reversion

The difference between two- and 10-year yields has failed to sustain the flattening momentum below 100 basis points, and this week’s renewed rejection boosts the chances of a mean-reversion toward the 55-day moving average at 113 basis points. A closing break above 107 basis points could complete a double-bottom and serve to amplify the steepening risk. (See story here on the widening gap between five- and 30-year notes.)

  • NOTE: Sejul Gokal is a technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.
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