Long-Dated Treasuries at Resistance Ahead of Key Catalysts

Long-dated Treasuries have rallied to resistance ahead of catalysts that could affect U.S. economic growth into the next decade. For starters, time is running out for the U.S. and China to cut a trade deal that relieves pressure on world equity markets. The Federal Reserve pause on interest rate hikes is intimately tied to these negotiations because a faster growth track is likely to generate higher inflation. A second government shutdown could also have an impact, dampening the trajectory of 2019 GDP.

According to founder BlackRock, Inc. (BLK), the iShares 20+ Year Treasury Bond ETF (TLT) "seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities greater than 20 years." The instrument offers a reliable snapshot of long-term bond trends as well as levels that need to be watched to gauge demand. It works especially well with the CBOE 10-Year Treasury Yield Index (TNX) in measuring the ebb and flow in those important venues.

The TLT bond fund entered a strong uptrend in February 2011, jumping off a trading floor in the upper $80s and breaking out in 2012 above the 2009 high at $123.15, posted during the darkest phase of the economic collapse. The trend advance topped out at $132.21 in August of that year and eased into a shallower trajectory, posting nominal new highs in February 2015 and July 2016.

A decline into July 2015 established range support at $115 that found committed buyers during pullbacks in 2016, 2017 and the first half of 2018. It finally broke down in October 2018, generating a selling climax that reached a four-year low at $11.90, ahead of a bounce that remounted support in December. Price action since that time has lifted the fund into the 200-week exponential moving average (EMA) and range resistance (upper red line), reinforced by four 2018 reversals.

Long-dated Treasuries often trade against equity markets, but both groups are now in sync, coupled by the threat of slower growth and lower demand for capital. A breakout above resistance at $123 would ease bearish technicals in place since January 2018, but it could take a bona fide trade deal to attract needed firepower. Even so, it's a two-edged sword because stronger growth may affect long-term inflation expectations, generating higher yields and lower prices.

The CBOE 10 Year Treasury Yield Index (TNX) posted an all-time high in 1981, at the same time the Dow Jones Industrial Index entered a historic uptrend, and entered a downtrend that is now in its 38th year. Price action eased into a descending channel in October 1987, with two trendlines limiting gains for the past 31 years. It hit a generational low near 14 in 2012 and tested that level in 2016, completing a potential double bottom reversal.

The index broke the red trendline in October 2017 and followed suit with the blue trendline in January 2018, signaling a multi-decade breakout that hasn't been confirmed in the past 13 months. However, it's still trading above both lines, while the monthly stochastics oscillator has dropped into the most extreme oversold reading since 2010, predicting that 10-year yields will rise in the coming months.

The 50-month EMA near 26 looks like major support on this massive chart, situated above both trendlines but below the January 2019 low. The 200-month EMA marks long-term resistance, as it has for the past three decades. Given this barrier, it will take a breakout into the mid-30s and 3.50% 10-year Treasury yield to confirm the double bottom reversal and proclaim the first bull market since the first year of the Reagan administration.

The Bottom Line

Long-term technicals predict that the 10-year Treasury yield will rise in the coming months, putting pressure on 30-year bond prices. In turn, this suggests that the iShares 20+ Year Treasury Bond ETF will have trouble gaining ground in 2019. 

Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.