A different sort of update, as I do not want to get lazy with the analysis that has been pretty much on point with respect to bonds. We expected a pullback in yields, it arrived and now it is time for open minds.
In NFTRH 527 we noted that the 30yr yield had faded back to an important test of the breakout above the monthly EMA 100. A failure below that marker could signal a deflationary event pulling at markets, but a hold of that marker could well go hand in hand with the opposite, a renewal of the various inflation trades (bombed out commodities and certain global markets certainly can bounce, after all).
Here is the picture of the pullback and test. The chart still shows the implied upside target of the yellow shaded pattern because this thing is still in breakout mode above the pattern’s top. Frankly, if it were a stock I’d consider it a buy.
So what might that tell us about the recent pullback across financial markets in the face of the strong US dollar? It might tell us that it was at the hands of a whiff of deflationary fears. But what if just maybe bonds are to remain bearish and the yield above, bullish?
Despite its total return including monthly dividend payments, the 20+ year Treasury Bond iShares (TLT) remains in a bearish posture by this weekly chart.
We had been looking for a bounce in Treasury bonds, quite likely with a lurch toward risk ‘off’ in financial markets. That is in the books; T bonds bounced (the yield in the 1st chart above pulled back to test the EMA and pattern top) and financial markets went risk ‘off’.
But now, with a Treasury bond contrary bullish sentiment setup no longer in play, all bets are off as far as I can see with respect to a bullish bond view.
Now, will long-term yields rise again? That is the technical trend from 2016 (not coincidentally when the inflation trade started). That is a fact, the trend is up in yields and down in bonds.
Will inflation expectations rise with yields if they do rise again? That is an open question, but often they do. We’d have to check in with items like TIP/TLT and TIP/IEF along the way. While they have been declining for several weeks with the market’s troubles, these ratios are also in uptrends from 2016. TIP/TLT is essentially flat lining, but if you believe in a pattern on a ratio, this one could be bullish.
I just wanted to call this to your attention in a preliminary way, but going forward there will be much input to consider. And I don’t want to alarm the stock market bears, but not all implications are bearish for asset markets, especially global asset markets. Nor should gold bugs necessarily be alarmed, but if yields do rise the yield curve had better also rise or there could be trouble there.
For now, consider this update simply a call to check our assumptions with respect to bonds and their upward price activity (downward for yields) over the last few weeks. We’ll have to define things as events unfold, with a big FOMC meeting on tap, no less.
