A Bounce Higher at Resistance Is Opportunity for Lower Yields

 

By Rom Badilla, CFA

August 28, 2012

Since the rip down in yields where resistance levels were broken, the yield on the 10-Year has been oscillating back in forth in a tight range the past several days. At 1.65% and right above a bigger barrier at 1.63/1.62%, the 10-Year U.S. Treasury remains at a critical juncture.

Credit Suisse technical analysts David Sneddon, Christopher Hine, Pamela McCloskey, and Cilline Bain anticipate sellers to emerge at the 1.63/1.62% level which may drive yields higher in the near term. However, they expect an eventual break lower after that. In Credit Suisse’s latest U.S. Fixed Income Daily, they provided the following color on where the 10-Year may trade:

10yr US yields continue to mark time just above better resistance at 1.63/62% – the 50% retracement of the recent sell-off. We allow for this level to hold further. However, while 1.71% minimally holds the immediate bias is for a break lower to 1.56/55% ahead of 1.45/44%. Removal of the latter would re-open a retest of 1.38/35%.

Above 1.71% would aim at 1.76% with firmer levels at 1.78/80%. We look for the latter to hold and the rally to commence from here. Only above risks a retest of the 1.86/89% support.

Currently, the research team is sitting on the sidelines but look to add should the 10-Year reach 1.75% with a Stop-Loss above 1.80%. The target is for 1.63% or a 12 basis point gain.

As for the Long Bond currently trading at 2.76%, the focus is on the next bigger barrier set at 2.71%. If the 30-Year Treasury trades below, the next stop could be a surge lower to 2.65%.

30yr has pressed back to last week’s yield lows which leaves the immediate focus on a bigger test at 2.71% – chart and the 50% retracement hurdle. We allow for this to hold again for a bounce. Below, though, would see a more extended rally in the range to 2.65% with a bigger chart barrier at 2.505%.

Above 2.83% is needed for a bounce to 2.85/86% with scope to range support at 2.89/90%. We look for the latter to hold and the recovery to resume from here. Above is needed to retest 2.955/985%.

The team of technical analysts is looking to buy at 2.85/2.86% with a Stop-Loss above 2.90% with an eventual move of 13 basis points lower for a target 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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Disclaimer
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.

 
 
 

1 Comment

  1. [...] we noted that the yield on the 10-Year U.S. Treasury was at a critical juncture and faced a bigger barrier at 1.62/1.63%. Since then, the bond market has rallied past to a recent [...]

 
 

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