It’s Soon Or Never For Bonds

There is great trepidation in the bond market these days. Most investors seem to have the “interest-rates-are-sure-to-rise” mantra playing on auto loop. And this is not entirely unwarranted. Given the historical tendency for bond yields to move in long, slow trends (20 years or more essentially in one direction is not uncommon), I for one am pretty confident in believing that interest rates will be higher 20 years from now.

But that is not the fear that is playing in people’s heads. The fear is that rates are rising soon (like immediately) and in a big way. This, however, may or may not prove to be the case.

Figure 1 displays a history of through about 2012 (FYI 10-yr. yields are roughly unchanged since that time). Note the long-term nature of interest-rate trends and that while there are “spikes” here and there, most major moves play out over time and not in a “here today, sharply higher tomorrow” fashion.

10-Tear Treasury Bond Yields: 1900-2012

10-Tear Treasury Bond Yields: 1900-2012

Figure 1: Courtesy: ObservationsandNotes.blogspot.com

Also, as I pointed out – and as you can see in Figure 2 – one can make a compelling argument that bond yields are not “officially rising”, at least not yet.

Down-Trending Yields

Down-Trending Yields

Figure 2

Bonds Are Due To Bounce – But Will They?

One way to identify important turning points in any market is when a market doesn’t do something that it would normally be expected to do. For example, here is a simple thought process:

  1. The bond market is oversold
  2. In the past 30 years, pretty much anytime it would get oversold a rally ensued
  3. Therefore, bonds should rally soon

But will they? That is the question. And in my opinion, the answer is important.

*If bonds rally soon (i.e., over the course of say the next several months) then “the status may still be quo”.

*If bonds do not rally soon, then it may be a sign that “things are changing”

Which Way Bonds?

Figures 3 and 4 below display ticker iShares 20+ Year Treasury Bond (NASDAQ:) (an ETF that tracks the long-term treasury bond) with an indicator I call Up-Days-20. In this case, we are looking at weekly bars – not daily – but the concept is the same.

Up-Days-20 is calculated by simply adding up all of the weeks that have showed a weekly gain over the past 20 weeks and then subtracting 10 (the AIQ TradingExpert Expert Design Studio code appears at the end of this article, after the disclaimer).

If 10 of the past 20 weeks have showed a weekly gain then the up-Days-20 indicator will read 0 (i.e., a total of 10 weeks were up minus 10 = 0). If only 6 weeks showed a gain in the past 20 weeks then the Up-Days-20 indicator will read -4, etc.

What to look for: Typically (at least in the declining rate environment of recent decades) when Up-Days-20 rises by a value of 2 from a low of -2 or less, a decent rally in bonds has ensued.

For example, if Up-Days-20 falls to -4 then a rise to -2 or higher triggers a buy signal. If it falls only as low as -3 then a rise to -1 or higher is required. If it falls only as low as -2 then a rise to 0 or higher is required.

Figures 3 and 4 highlight signals since roughly 2004.

iShares 20+ Year Treasury Bond Buy Signals: 2004-2010

iShares 20+ Year Treasury Bond Buy Signals: 2004-2010

Figure 3: Courtesy AIQ TradingExpert

iShares 20+ Year Treasury Bond Buy Signals: 2010-2017

iShares 20+ Year Treasury Bond Buy Signals: 2010-2017

Figure 4: Courtesy AIQ TradingExpert

As you can see in Figures 3 and 4, most of the signals highlighted were followed by at least a decent short-term rally.

In 2017, buy signals from the UpDays20 indicator occurred on 1/13 and 4/14. TLT is up +0.3% since the 1/13 signal and down -1.4% since the 4/14 signal.

Summary

Either:

1) This is an excellent time to buy the long-term bond (looking for at least a short to intermediate term rally) as a rally is overdue

OR

2) The “times they may be a changing” for bonds

So keep an eye on TLT over the next several months.

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