Extension Through Resistance Would Signal Top in Yields for Treasuries
By Rom Badilla, CFA
August 22, 2012
After identifying significant support at 1.86%-1.87% where there was strong interest from buyers, the 10-Year U.S. Treasury yield has traded sideways in a tight range the past few days. A breakout from here though could signal an extended move in the short-term.
Credit Suisse technical analysts David Sneddon, Christopher Hine, Pamela McCloskey, and Cilline Bain reiterated from several days ago that if the 10-Year takes out the lower end of the range at 1.78%, a short-term top would be signaled and the next target would be lower yields. In Credit Suisse’s latest U.S. Fixed Income Daily, they provided the following color:
10yr US yields remain locked in a tight range this week. Selling was reversed again at the range support at 1.86/89% as equities retreated from their highs. This saw a test of the yield range lows at 1.78%. A break below here is still need to confirm a small top and would then aim at 1.73/70% – chart resistance and range projections. We would expect a bounce from here, and below it is needed to aim at 1.68/65%. Key to a more extended turn in the range is a break below 1.63/62%, which would then aim at 1.56/55%.
Above 1.86/89% and through 1.92% would signal a more extended bear phase for 2.01/04%.
As mentioned here, they were short or sold the 10-Year at 1.77% and covered or bought back at a lower price at a yield of 1.84%. Now they are bullish Treasuries by going long or buying the 10-Year at 1.84% with a Stop-Loss set above 1.89%.
As for the Long Bond, a move lower in yields would signal a top in the short-term which would target lower. The analyst team from Credit Suisse wrote the following:
The 30yr US reversed early selling yesterday to challenge again the current yield range lows at 2.89%, which saw the threat of small yield top mount. We look for an extension through here to confirm and then target 2.85%, with pattern and initial retracement hurdles showing at 2.79/78%. Below 2.71% – chart and the 50% retracement barrier – is needed to signal a more extended rally in the range to 2.65% next.
Above 2.985% would see a yields extend their advance to 3.09/10%.
Currently, they are long at 2.96% with a Stop-Loss above 3.02%. Their target is for a 16 basis point drop in yield to 2.80%. The current on-the-run 30-Year U.S. Treasury (2.75% Coupon Maturing August 15, 2042 CUSIP 912810QX9) has a duration of 20.2 years. So for a 16 basis point decline, the percentage price gain for the bond would be 3.2% on a one-time levered basis.
To understand how to amplify returns using a similar strategy, check out the article, Gain 35% Return by Trading U.S. Treasuries.
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