Rally Ahead After Treasury Yields Kiss Resistance?


By Rom Badilla, CFA

August 2, 2012

With today’s positive action in the bond markets, the yield on the 10-Year U.S. Treasury is currently trading at 1.46% which is down 5 basis points from yesterday’s close. As noted several days ago, this level is a key resistance level and could propel the Treasury market for further gains.

Credit Suisse’s research analysts David Sneddon, Christopher Hine, Pamela McCloskey, and Cilline Bain provided color in their August 2, 2012 U.S. Fixed Income Daily regarding the yield on the 10-Year U.S. Treasury:

A break below 1.46/45% is needed to re-open a test of 1.39/38% – the record yield low and trend resistance. We again look for selling here and only below it would open up a test of the 1.35% Fibonacci barrier.

As was the case earlier, their current strategy continues to be in the bullish camp as they have a long position at 1.55% with a 16 basis point target at 1.39%. This equates to about a 1.4% gain in dollar price on the 10-Year which currently has a 8.94 duration (16 basis point x 8.94 duration = 1.4% dollar price gain). In addition, they have a Stop-Loss set at 1.60%.

Support lies at 1.55%/1.60% area which is where they could see buyers emerge since it is the 40-day moving average, the top of the channel which acts as support, and the 61.8% Fibonacci retracement support level. Beyond that, they see bigger support at 1.73% yield peak.

Following suit, the Long Bond is hitting resistance with the yield of the 30-Year at 2.54%. The research team added the following:

Below 2.54/52% would again target channel resistance at 2.45/44%. We would again look for selling here and a bounce in yields. Below 2.445% would get the bull  trend back on track for 2.25/20% next.

In addition, they see support at the 40-day moving average which is around the 2.635%/2.65% range. An extension through there could lift the yield to 2.70 to 2.72% range which is the top of the trend-line and the 61.8% Fibonacci retracement level of the June to July rally. 2.78% followed by 2.83-2.855% are significant support levels farther out.

Credit Suisse’s team is currently long at 2.60% with a Stop-Loss at 2.65% with a target of 2.45%. Their target drop of 15 basis point equates to a 2.9% gain in the 30-Year since the duration is at 19.48 years (15 basis points x 19.48 duration = 2.92% dollar price gain).

Be sure to check out our popular Bond University if you like this post. In addition, check out this article posted in the Trading & Investing Strategies section for ways to enhance beyond buy and hold static strategies.

The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.



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