Yields Sliced Through Resistance and Now at Critical Juncture
By Rom Badilla, CFA
August 24, 2012
Several days ago we covered that an extension past resistance would signal a short-term top in yields and the next target would be lower. As predicted, the 10-Year pierced through resistance at 1.78% when Treasuries rallied hard on concerns of ebbing economic growth.
Credit Suisse technical analysts David Sneddon, Christopher Hine, Pamela McCloskey, and Cilline Bain highlight the importance of the 1.63/1.62% level which if pierced could lead to an extension lower in yields. In Credit Suisse’s latest U.S. Fixed Income Daily, they provided the following color:
10yr US yields prodded below retracement resistance yesterday at 1.68%. We allow for a potential early snap back bounce but look for a test of a bigger barrier at 1.63/62% – the 50% retracement of the recent sell-off. We would expect a bounce from here initially. Extension below it is needed for strength to 1.56/55% ahead of 1.45/44%.
Above 1.76% aims at 1.78/80% and through here is needed to ease immediate bullish risks and retarget 1.86/89%.
In addition to the above support levels in the event of a selloff in Treasuries, support lies at 1.92% and 1.98%.
As for their positioning, they covered their trade from 1.84% when the 10-Year yield reached their target at 1.70%.
Currently, the 10-Year reached the aforementioned ‘bigger barrier’ in early intraday trading on Friday and bounced to 1.65% according to Trade Monster’s Bond Trading Center after today’s Durables Goods report which signals further that growth may be slowing. At this critical juncture, it appears that Credit Suisse’s analysis is spot on as the 10-Year is hitting a wall. Having said this, we could see a bounce back toward 1.68% which could be an opportunity with eye toward lower rates given the technical backdrop.
As for the Long Bond, yields followed suit and have plummeted. Credit Suisse added that after breaking below resistance, the 30-Year will test lower.
30yr US paused for thought yesterday on its test of resistance at 2.79/78% – range projection targets and the 38.2% retracement barrier. We look for a break below here to target key resistance at 2.71% – chart and the 50% retracement hurdle. A break here is required to signal a more extended rally in the range to 2.65% next.
Above 2.89/90% is needed to ease bullish pressure for 2.96/985%.
Currently, the 30-Year is trading at 2.77% after reaching a Friday intraday low of 2.747 which is just short of Credit Suisse’s key resistance level of 2.71%. So unlike its 10-Year counterpart, the Long Bond still has the potential to probe lower given their analysis.
Credit Suisse’s strategy going forward is to buy again should the Long Bond reach higher at 2.85/2.86% with a Stop-Loss set at 2.90% and a 13 basis point move lower to a target level of 2.72%.
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 13 basis point decline, the percentage price gain for the bond would be 2.6% 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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