There is a debate right now about what phase of the market cycle we are in. There are signs that we are close to the end of the general equity slowdown and may be close to a recovery. Why this? Bonds could have bottomed out last month around the June FOMC meeting. That’s when Treasury yields climbed to nearly 3.5% across much of the curve. A major bond rally ensued, bringing 2- to 10-year rates to less than around 2.8%.
This morning the week begins with modest offers on Treasuries with slightly lower yields despite some weekend headlines.
US Treasury Rate Today
Technicians like to observe how three groups evolve: stocks, bonds and commodities. Those who have completed the Chartered Market Technician (“CMT”) program may remember this trio’s streak as “BSC.” Bonds move first, then stocks, then commodities – at least that’s the rule of thumb when it comes to intermarket asset class trends.
For example, a market top is observed when stocks and bonds fall while commodities rise (this was the case at the end of last year). That was Stage 5. Recently, however, bonds have caught an offer, as commodities have slumped. Then, as mentioned earlier, bonds started to rise (yields fell) while commodities continued to fall. This inflection often coincides with an economic contraction (recession). So does that mean we’re around stage 2? Do you need to stock up? Tough call, but let’s focus on fixed income for now.
The economic cycle and intermarket relations
In my eyes, the best indicator of the US government bond market is the iShares US Treasury Bond ETF (BATS: GOVERNMENT). The fund tracks an index composed of US Treasury bonds, according to iShares. Including dividends, it has fallen by more than 9% this year, as rates have risen sharply. GOVT’s duration, a measure of sensitivity to changes in yields, is 6.3 years, while its current average yield to maturity is 3.2%. At just 0.05 percentage points, it’s a cheap way to hold Treasuries with no risk of default.
GOVERNMENT: General Treasury market yields > 3%
There is tremendous volatility on the Treasury yield curve right now. The ICE BofAML MOVE index (“MOVE”) measures the volatility of rates from the 2-year note to the 30-year bond using option prices. At 145%, rate volatility is the highest since 2009, so expect relatively large swings in GOVT from the generally calm trading ranges of years past.
ICE BofA MOVE Index: Treasury market volatility highest since 2009
The technical grip
GOVT has work to do. Since the ETF’s inception in early 2012, the $24 zone has been important. It was the lowest in the third quarter of 2013 and it also found support there during the rate hike cycle at the end of 2018. Today it fell below the key point, but is back there . Could a fake bullish breakdown be on the way? Watch $24 in the coming weeks. We will get important CPI data later this week and a pivotal Fed meeting on July 27th that could trigger the next trend.
Above this level, $26 is a critical line in the sand – it was a neckline towards a bearish head and shoulders pattern that spanned late 2019 into early 2022.
GOVERNMENT: $24 A pivot point, further resistance at $26
GOVT follows the entire Treasury curve. Analysts are eyeing a possible bullish reversal that could justify a shift in the stage of the market cycle to a more bullish stock regime. Time will tell, but watch how GOVT is trading around the crucial $24 price level.