U.S. Treasury Bulls Take Over the Reins for Lower Yields

By Rom Badilla, CFA

September 5, 2012

Previously, 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 low in yields of 1.55%.

Credit Suisse technical analysts David Sneddon, Christopher Hine, Pamela McCloskey, and Cilline Bain are still in the bullish camp with another push lower in yields according to their tea leaves. 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 close in on trend resistance at 1.52/50%. We allow for this level to hold at first and a modest back up in yields from it. However, while contained below 1.70/71% we will stay directly bullish. Through 1.50% would aim at 1.45/44%, ahead of the 1.38% low.

Support is initially at 1.60/61% then 1.655/675%. Above here would aim at 1.70/71% which we would expect to hold.

Bond Trading 10-Year U.S. Treasury

The research team’s current plan is to look to buy again should the 10-Year reach 1.65% with a target for 1.45/1.44%. Should this play out, this 20 basis point gain should equate to a 1.8% dollar price gain given the duration of the current 10-Year is at 9.1 years (0.20% x 9.1 Years = 1.8% Dollar Price Gain). The research team looks to put a Stop-Loss above 1.675% for a risk of dollar loss of 0.2%. This is an 8 to 1 reward to risk ratio in this particular trade scenario.

As for the 30-Year U.S. Treasury which is currently trading at 2.70%, the focus for another push lower is on resistance set at 2.65%. As always with the markets, price is the final arbiter so a pierce below that would provide momentum for another test to the all-time low in yields.

The current 10-Year U.S. Treasury is 1.625% Coupon, Maturing August 15, 2022 (CUSIP 912828TJ9).

The Credit Suisse research team wrote the following:

30yr US has extended its rally through 2.71% and is now testing the 2.65% – the 61.8% retracement of the July/August setback – barrier. We allow for this to hold at first. However, an eventual break below here remains favored to keep the immediate risk bullish for 2.505%, then the 2.44% low.

Support remains initially at 2.72%, with 2.78/79% ideally holding to keep the immediate risk bullish.

Bond Trading 30-Year U.S. Treasury

Their current strategy is to buy at support set at 2.72% and 2.77%. with a Stop-Loss set above 2.79%. They look for a 16 basis point target established at 2.56%. Given that the duration of the current 30-Year U.S. Treasury is 20.3 years, this trade scenario would return 3.3% in price appreciation (0.16% x 20.3 Years = 3.3% Dollar Price Gain).

The current 30-Year U.S. Treasury is 2.75% Coupon, Maturing August 15, 2042 (CUSIP 912810QX9).

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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