There’s blood in the streets of the Treasury bond market.
The price of long-term Treasury bonds – as represented by the iShares 20+ Year Treasury Bond Fund (TLT) – has collapsed. TLT fell 4% last week. It’s down nearly 8% in just the past month.
That’s an enormous decline for a Treasury bond investment.
Think about it… An 8% move in your favorite cannabis-laced blockchain stock is a big deal. But, that’s a high-risk/high-reward proposition. You expect big swings in that sort of investment.
But Treasury bonds are supposed to be boring, low-risk, stable securities. You normally don’t expect such volatility in securities backed by the full faith and credit of the U.S. government.
Then again… come to think of it… the government had a tough week.
Now, though, Treasury bonds are as oversold as they’ve been all year. TLT is historically far below its various moving average lines. And, to me at least, the Treasury bond market looks poised for a short-term bounce.
Take a look at this chart of TLT…
TLT rarely trades more than 2% away from its 50-day moving average line (the blue line on the chart), and it’s almost always right on its 9-day exponential moving average (the red line). On Friday, though, TLT closed 4.7% below its 50-day MA and almost 2% below its 9-day EMA.
Notice also how all of the technical indicators are deeply oversold and near the lowest levels of the year. The last time we saw conditions like this was back in mid-February. TLT rallied 4% over the next five weeks.
I expect we’ll see a similar rally this time around. And, I think that rally will start today.
Take a look at this 15-minute chart of TLT…
Last Thursday and Friday, as the price of TLT was falling and making lower lows, the MACD and RSI momentum indicators were rallying and making higher lows. This sort of “positive divergence” is often an early warning sign of an impending change in trend.
This is a 15-minute chart – which is best used to spot potential short-term moves. Patterns on this time frame tend to play out within just a couple of days.
Since this chart has shown positive divergence for the past two days, I suspect TLT will start to rally today.
Don’t get me wrong… interest rates are moving up, and the long-term trend in T-bond prices is bearish.
But after last week’s bloodbath in the Treasury bond market, we now have historically extreme oversold conditions. And those conditions often lead to at least a short-term bounce.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Where you do see the T-bond market heading in the coming days? Do you agree with Jeff that a short-term bounce is ahead?
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