Bonds Consolidating in Familiar Support Regions

The U.S. 10-year yield moves up to 4.147%

• U.S. Treasury notes and bonds are holding near their lowest levels of 2024.
• Rate cut odds for 2024 have plummeted, with the odds of a 25-bps rate cut in March down to 47.4% today from 81% at the start of last week.
• Bond volatility has all but completely disappeared.

Inflation is slowly but surely making progress towards the Federal Reserve’s medium-term target of 2% and the U.S. economy is growing at a strong clip.

Rate cut odds for the March Federal Open Market Committee (FOMC) meeting have likewise pulled back, from 81% at the start of last week to 47.4% today in the wake of the recent economic data. The net result for the bond market has been a pause in the sell-off, with neither bulls nor bears asserting much control over price action in recent days.

The forthcoming week may help wake bonds out of their slumber, which has become more pronounced in recent days as IVRs for 2s (/ZTH4), 5s (/ZFH4), and 10s (/ZNH4) have all dropped below 5, while 10s (/ZNH4) and 30s (/UBH4) have IVRs below 15. The disappearance of volatility is a marked shift from 2023, when volatility was consistently elevated.

Despite current market pricing, a week that promises the January FOMC meeting and the release of the January U.S. jobs report should help spark the next meaningful directional move in bonds.

/ZN U.S. 10-year note price technical analysis: daily chart (August 2023 to January 2024)

The U.S. 10-year Treasury note (/ZNH4) is working on its second-lowest close of the year on a daily basis and the lowest weekly close of 2024. But /ZNH4 is currently trapped in a familiar zone of support, the area where prices temporarily peaked in early-December 2023 and initially bottomed out on Jan. 5. Momentum remains weak, however, with /ZNH4 below its daily 5-, 13-, and 21-day exponential moving average (EMA) envelope (which is in bearish sequential order). Slow stochastics are trending lower in oversold territory, and moving average convergence/divergence (MACD) is still trending lower toward its signal.

A break of the current support zone around 111 would open the door for a deeper setback towards area around 109'20 that served as both support and resistance from mid-November to early-December.

As was the case last week, the lack of pickup in volatility (IV Index: 6.7%; IV Rank: 4.4) further underscores why bulls (particularly those that successfully sold puts at the end of 2023) need to be patient and let the charts unfold; there is little rhyme or reason to begin trying to collecting premium right now.

/ZB U.S. 30-year bond price technical analysis: daily chart (August 2023 to January 2024)

Like /ZNH4, U.S. Treasury 30-year bonds (/ZBH4) are working on their lowest weekly close of the year.

Momentum remains weak, with /ZBH4 exhibiting the same exact profile (EMAs, slow stochastics, and MACD) as /ZNH4. That said, /ZBH4 is already holding support at the area around 118’09/28, which proved pivotal at the end of November/beginning of December. We noted last week that this area “seems likely to prove to be an area of interest should downside price action develop further,” and it has held as support thus far. The renewed lack of volatility in /ZBH4 (IV Index: 12.3%; IV Rank: 12) suggests more patience is needed; a break of the downtrend from the intramonth swing highs would suggest long call spreads might become appropriate.

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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