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%.

Bond Trading 10-Year U.S. Treasury

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%.

Bond Trading 30-Year U.S. Treasury

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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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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