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Oct 11, 2023

Enough with the Bonds!

By:Christopher Vecchio - CFA

The supposedly safe haven 20-year Treasury bond ETF (TLT) has lost 16.8% over the past 10 years

  • Last week produced the highest single-day volume in TLT in history.
  • The past two weeks have seen more than 3 million contracts traded in /ZB; the last time this happened was at the depths of the coronavirus pandemic in 2020.
  • The Federal Reserve has been offering clear signals that the rate hike cycle is finished.
Year-to-date price percent change chart for /ZT, /ZF, /ZN, /ZB, /UB
Year-to-date price percent change chart for /ZT, /ZF, /ZN, /ZB, /UB

For all the talk about the lost decade in stocks between the dot-com bubble burst and the global financial crisis, the sell-off in bonds has been equally bad if not worse (depending upon your look-back period). The iShares 20+ Year Treasury Bond ETF (TLT), a 20+ year Treasury bond exchange-traded fund, or ETF, has lost 16.84% since Oct. 1, 2013.

Alas, it’s always darkest before dawn, and there are legitimate signs that the sun is coming beginning to rise once again.

Some notable events happened in the bond market over the past week. TLT produced its single largest volume day ever on Tuesday, Oct. 3, as U.S. Treasury yields reached fresh cycle highs. Looking to the futures market, ZB produced back-to-back weeks where more than three million contracts were traded.

To the latter point, the last time this happened was the last week of February and the first week of March 2020; the second week of March 2020 produced the cycle high in bond prices.

These are classic signs of exhaustion within the prevailing trend. In the current context, sellers have been exhausted. Since the record volume day in TLT last Tuesday, bonds have rallied across the curve; TLT is up +4.25% from last week’s low. During this time, the U.S. Treasury 10-year note yield has fallen from 4.887% to 4.587% and the 30-year bond yield has dropped from 5.052% to 4.729%.

Alongside these technical observations, the fundamentals winds have begun to shift as well. Fed rate hike odds through the end of the year have fallen from just below 50% to 29% over the past month, per Fed funds futures (/ZQ) and three-month SOFR (/SR3).

Federal Open Market Committee (FOMC) officials—Mary C. Daly, president of the San Francisco Fed, Lorie K. Logan, president of the Dallas Fed, Raphael Bostic, Atlanta Fed president and Fed governors Philip N. Jefferson and Christopher J. Waller—have over the past few days suggested no more hikes are needed.

/ZBZ3 U.S. 30-year bond price technical analysis: daily chart (May to October 2023)

/ZBZ3 U.S. 30-year bond price technical analysis: daily chart (May to October 2023)

The technical trend has turned as well. After closing below it every session since Sept. 14, /ZBZ3 clocked its first close above its daily five-day exponential moving average (one-week moving average) on Monday, Oct. 9. MACD has issued a bullish crossover, and slow stochastics have exited oversold territory for the first time in a month. Looking to the options market, a short put vertical (long 108 put/short 1110 put) for the Nov. 24 expiry (44DTE) suggests a POP of 75%. Cumulatively, there are tangible reasons to think a tradeable low has been established.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx 

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