Yields Archives | Opportunity Identified

June 27, 2017 | Posted by David Zarling, Head of Investment Research

Here’s The Skinny On Long Bonds

Back in mid-April, we posted about Why You Should Be Long The Long Bond. Back then, we noted the extreme pessimism regarding US Treasuries (aka Long Bonds) due to skewed short positions and anecdotal evidence that too many were confident yields would go higher. This long bond pessimism, and more importantly, the price action of Long Duration Treasuries (ticker: TLT), had us more than just liking long bonds. In fact, we became rather obnoxious about them on Twitter:

A little over 2 months and +7% later, and we’re back writing about long bonds. Why? Not because we love bonds so much. Rather, if you’ve been long the long bond since our Tweets and subsequent post, we think it might be time to take some of those gains off the table. In our April post, we wrote:

The longer demand pushes and holds TLT above 122, the more likely we revisit the gap breakdown near 129.

Yesterday, TLT quickly reacted to the high of 128.57. Close enough fro us. There is a reason for using price targets. These measured moves define our potential reward when determining whether a trade opportunity exists. What’s our risk? What’s our reward? The answer to these questions will determine whether or not it makes sense to enter a new position. After all, everyone should have an exit plan prior to entering a trade. That’s sound risk management and our number one priority as market participants. Yesterday, the ETF for Long Duration Treasuries (ticker: TLT), hit our upside target. Not only that, but we have this important new development: Last week alone, TLT received more inflows than all domestic equity mutual funds, and all domestic equity ETFs combined year-to-date [1]. Think about that for a moment. In only one week, TLT exceeded the total incoming purchases of all domestic equity mutual funds and ETFs made in the past 6 months! Talk about a sentiment shift. Everybody and their grandma is now piled into Long Duration Treasuries. Sounds like a crowded trade to us. Large crowds make for small exits. Can Treasuries move higher from here? Absolutely. However, without price sustaining 129 (and above) on TLT, we would be very skeptical of any further upside in this move. Keep in mind, this move from March until now is countertrend in nature. Price is above a falling 200-day simple moving average. A falling 200-day simple moving average is a hallmark of downtrends. As a friendly reminder, bonds and yields have an inverse relationship.

And if long bonds are reversing here, it means higher yields are on their way. And if higher yields are on their way, it will include ramifications for some other important sectors [cough *Financials* cough], which we’ll cover in another post. For the time being, TLT needs to regain 129, or at a minimum, stay above 124 to ruin our “higher yields from here” thesis.

In conclusion, with TLT reaching our price objective in a countertrend trade and inflows reaching extreme levels, we think it makes sense to take some off the table here. What applies to us may not apply to you. Trade safe.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

By the way, we created this free tool for you, The Ultimate ETF Cheat Sheet. It’s an easy-to-use ETF resource guide. We think you’ll like it.

[1] Source

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.

April 17, 2017 | Posted by David Zarling, Head of Investment Research

Here’s Why You Should Be Long The Long Bond. (Are You Shorting Them Right Here, Right Now?)

Disbelief is not an investment plan. I have yet to come across a successful investor or trader whose main investment philosophy is solely, “this won’t end well.” We can have all the strong opinions we want, but I’ll let you in on a little secret. Markets don’t care what we think. Markets are going to do what markets are going to do. We cannot bend them to our will. The faster we check our opinions (and pride) at the door and humble ourselves to the all-knowing market forces of supply and demand, the sooner we can begin to profit from objective facts and avoid losses generated by subjective opinions. Over the past few months, a very popular subjective opinion has reached a crescendo: higher rates/yields are all but certain going forward. As usual, this narrative became popular after the objective facts were already in motion. Beginning in July 2016, long bond yields (aka 20+ year U.S. Treasury yields) were rocketing upward as long duration bonds were selling off hard. Only after this move did the media begin touting lower bond prices and higher yields. Prices drive narratives, not the other way around. For example, with a solid bond sell-off already in motion, the financial media informed the investing public that higher yields were all but certain for the foreseeable future. Take a look at their helpful timing below. You can’t make this stuff up.

See how that works? Price first. “News” second. As soon as you realize how this sequential relationship works, the more you’ll be able to filter the “news” you consume. Is there a better way? Absolutely. Study objective facts instead. In other words, study price. It knows more than we do. In this case, the price of bonds knows more than we do. Conversely, yields know more than we do. As a refresher, yields work inversely to bonds. When bond prices rise, their corresponding yields drop.

What does supply and demand for 20+ year Treasuries look like right now? Here’s the weekly chart of TLT, an ETF that does a good job performing similarly to 20+ year Treasuries.

As you can see, after reaching all-time highs in July 2016, bonds began selling off in earnest. Because of the inverse relationship between bonds and their yields, this move caused yields to rise sharply. Only after this took place did financial news pundits begin pounding the table regarding higher yields and the consensus become rates would continue to move higher in 2017.

But after the rapid selloff in bonds, we’ve seen them stabilize sideways for several months. Meanwhile, consensus public opinion is loud: “higher rates during 2017 are a certainty!” This strong opinion has been matched with strong positioning. An especially high amount of investors are shorting long duration bonds. This means they are placing wagers that bond prices will continue to fall. With record short bond positions, this important credit instrument is sitting on upside jet fuel. What do we mean? Basically, if bonds rose enough in price it could trigger a short squeeze, a scenario in which shorts are forced to cover their losing position by buying bonds. This causes a feedback loop in which bond prices rise quickly while short-sellers continually scramble to cover their positions. Here’s the daily chart of TLT:

Three days ago, it broke above an area of supply, which acted as resistance four times before. This breakout is significant and is taking place when most are not expecting it. If this recent breakout requires short sellers to cover their positions, it’s going to throw jet fuel onto the demand fire. Above 122 on TLT, it makes sense to own long duration treasuries. Below that level, we’d be on the wrong side of the trade. The longer demand pushes and holds TLT above 122, the more likely we revisit the gap breakdown near 129.

Right now, chances are, if you asked your financial advisor, banker, friend, grandma, or typical TV pundit, they would all say they’re expecting higher rates going forward. Anecdotally, I have it on good authority during this year’s Market Technician Association’s Symposium in New York, they asked for a show of hands when asked: “do you think rates will be higher at the end of this year?” I was not there but the entire room raised their hand. This room is filled with incredibly smart people. And all of them raised their hand. All. Of. Them. Don’t take what I’m implying here as a slam on the consensus demonstrated or the intellect of those in the room. Rather, I’ll go out of my way to highlight the intellectual horsepower of any one of the individuals in attendance is multiple factors above of my two-cycle excuse for gray matter. These are extremely smart people and their collective opinion is higher yields are on their way. Are they right or are they wrong? I have no idea. It’s not about being right or wrong anyway. It’s about being on the right side of the trade. Price has the final say. Accordingly, we should be watching long duration treasuries with a simple game plan: own TLT above 122 (and watch the corresponding yield drop). Below that, it’s hands off while the rise in yields continues to fuel consensus.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.

February 25, 2015 | Posted by David Zarling, Head of Investment Research

Yields Retreat As Bonds Bounce Off Logical Resistance

Technical analysis allows us to identify logical points of increased supply or demand for any liquid security. We can find places where a change in the direction of price is likely. As previously mentioned, this applies to any liquid security we can chart, including bonds. Over the past week, the financial media has been quick to point out the “spike in bond yields.” While true, bond yields have moved quickly upward since the beginning of February, the bigger trend (yields decreasing) remains intact. And as of the past few days, we find that bonds and yields are reacting to logical points of resistance. Let’s take a look at the 10 Year Treasury Note Yield ($TNX) and the 20+ Year Bond Fund ETF from Barclays (TLT) so you can see what we see. But before we get too far, it should be remembered that the relationship of bond yield to bond price is simply this: when the bond price goes up, its yield goes down and vice versa. Technically said, a bond’s price and its yield are inversely related. Ok, on to the charts.

First, the weekly chart of the 10 Year Treasury Note. Notice that for 20 years now, the yield on the 10 Year has been steadily declining within a well defined trend as marked by the green channel. Annotated in orange is the incredible “spike in yields” being reported. As you can see, this is minor in relation to the overall trend. We do concede that someday, yields will breakout of this channel and begin a new upward trend, bringing many financial ramifications with it. We’ll make sure to let you know when that happens. But for the time being, the overall trend in yields is down.

Taking a closer look at the 10 Year Yield below, we find that its yield has reversed course upon reaching 4 different levels of significant resistance:

The mid-channel line dating back 20 years
Demand/supply dating back to 2009
38.2% Fibonacci retracement from 2013 highs
Former support turned resistance dating back to 2012

This is a logical move and one that indicates a high probability of resuming the downward pressure on yields.

The resumption in downward yield pressure and upward bond price movement can also be seen by taking a look at the 20+ Year Bond ETF, TLT. Looking at the chart below, it’s easy to see that prices dropped from January highs and have so far found demand around the 126 level, which used to be a prior supply/resistance level. In addition, this bond ETF continues to move within an upward slopping series of tram lines. Until the 126 level and lower boundary tram line is broken, the trend in bond prices remains up. With bonds finding support here and major stock markets breaking out across the globe, it’s our opinion that we’re likely headed into an environment of rising bonds and stocks. In the end, however, that is our opinion. We don’t trade on our opinion. We trade on price, the only opinion that matters.

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