Technicals on Treasuries Reveal Risks for Higher Rates

By Rom Badilla, CFA

September 18, 2012

With the recent sell off in the U.S. Treasury 10-Year fueled by the Federal Reserve’s expansion of the balance sheet and the subsequent rally in equities, support has held at 1.89%. While the bond bears are quiet for now, risks are still seen for a push higher in yields.

Credit Suisse technical analysts David Sneddon, Christopher Hine, Pamela McCloskey, and Cilline Bain see that risks remain for the 10-Year to reach as high as 2.00/2.01%. In Credit Suisse’s latest U.S. Fixed Income Daily, they provided the following color on the 10-Year:

10yr US yields have managed to hold initially at the 50% retracement support at 1.89/90%. In light of the recent sell-off we allow for this level to hold for now and to see a modest a check back from here.  However, the broad risks stays higher to 2.00/01% – triangle and 61.8% retracement support – next. We would again look for buying here and for it to hold initially. Through here would aim at 2.08% next.

Resistance remains initially at 1.79%, but through 1.71/69% is needed to ease the immediate bearish pressure.

Bond Trading 10-Year U.S. Treasury

Another key support is 1.92% while another area of resistance lies at 1.65/1.635% and 1.60/1.59%.

Currently, the technical analyst team does not have a position but looks to short the 10-Year U.S. Treasury. Here, they would sell at a higher price that translates to a yield of 2.00%. Then, they would cover or buy back at a lower price which equates to a yield of 1.84%. A Stop-Loss would be set below 1.69%.

As for the Long Bond, yields have spiked higher with the 30-Year U.S. Treasury holding the break above 2.945/2.985%. Despite this, the risks are for a further sell off which will translate to much higher yields according to Credit Suisse.

30yr US has found buying on Monday at support at 3.09/125% which has seen yields check back lower. However, the break of former key support at 2.94/985% has been maintained, which leaves a bigger base in place. We therefore expect near-term strength to prove short-lived and to see an eventual push higher up to 3.17%, then 3.20/23%. We would expect buying here, but through it would target better support at 3.34/36% – channel props and the 38.2% retracement of the 2011-12 rally.

Resistance shows at 3.01/00% initially then 2.925/90%, but through 2.82/80% to ease bearish pressure.

Bond Trading 30-Year U.S. Treasury

The research team covered a short position at 3.10%. They are keeping their bearish bias by looking to short again at 2.93% with a Stop Loss below 2.89%. The target is for a backup of 17 basis points for 3.20%.

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