1/ 10-year Yield Resumes Uptrend
2/ 20+ Year Treasury Bonds Gap Down
3/ Credit Spreads Sanguine…For Now
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1/ 10-year Yield Resumes Uptrend
Simplicity often trumps complexity. One need look no further than a weekly chart of the 10-year yield which shows its ascent from the COVID bottom. For years prior to bottoming, I had heard about us entering a “rising rate environment” without any sort of supporting evidence from the bond market.
Markets don’t move in a straight line. There are typically periods of advances/declines and consolidations (sideways or countertrend movements). The first pattern that emerged in this chart is an ascending triangle which is a bullish trend continuation pattern. What followed was a descending triangle given the lower highs and well-defined horizontal support zone. Descending triangles are usually looked at as bearish continuations during a downtrend. However, in an uptrend, once the upper bound gets breached, it signals a resumption of that uptrend. The much-predicted “rising rate environment” appears to be here.
2/ 20+ Year Treasury Bonds Gap Down
Few charts have traded “cleaner” in the past few years than the chart of the iShares 20+ Year Treasury Bond ETF (TLT). What I mean by “clean” is the tendency for the price action to respect horizontal boundaries set by supply and demand dynamics.
Bonds are supposed to be the ballast of a diversified portfolio, but all who experienced last year will testify that that is not always the case. Long bonds rebounded from their October ‘22 lows only to hit their head on the ceiling established by the June ‘22 lows. Those October lows served as momentary support before recently experiencing a breakaway gap, and they look to be continuing their decline.
3/ Credit Spreads Sanguine…For Now
Often looked at as the canary in the coal mine for market stress, credit spreads are not blinking in the face of our recent pullback in equity markets. Bond investors are sometimes looked at as the “smart” money due to their inherent reliance on a company or government paying back their principal.
When things get hairy, the lowest credit quality bonds (“junk bonds”) are usually the first to get sold which causes their yield to rise faster than an identical Treasury bond. This causes the spread, or difference, between the two yields to increase. As seen in the accompanying chart, credit spreads are near their lows across a range of lower credit ratings. Contrast that with March when the regional banking crisis caused a sudden spike.
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Originally posted 27th September 2023
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