US Treasury Bond Breakout Ahead?

Last week, I had the pleasure of being on Real Vision TV, where I recorded two segments, one on bonds and one on an equities pairs trade. The video to the equities trade is here, but since I'm not sure if/when the free video about bonds will be out, I wanted to go through that trade for you all on the blog. If the video does come out, I'll be sure to share it.

First, let's start off with the benchmark 10-Year yield that most investors look to when talking about bonds. Rates bottomed in 2016 and were in a clear uptrend until the middle of last year, when they tried to break out above 3.00% as momentum diverged. That proved to be a failed move and got us very bullish on bonds for the first time in a long time.

But it's not just a U.S. Story. Rates across the developed world have consolidated near their 2018 lows for some time, but they are rolling over again. If rates all around the world are falling, we expect the U.S. to follow suit.

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Flows into more defensive sectors of the market continue, with utilities making new all-time highs and U.S. real estate investment trusts (REITs) now joining the party. Additionally, we continue to see strength out of "Low Volatility" and "High Dividend" factors both on an absolute and relative basis. Bond market participants need to get yield somewhere, and they're doing it in these sectors.

So that brings us to the vehicle we're going to use to take advantage of lower rates going forward. Here's the iShares 20+ Year Treasury Bond ETF (TLT), which has formed a nice base (or inverse head and shoulders for you pattern fans) over the past year and is now back toward the top of its range.

What I like about this trade the most is that our risk is very well defined. This thesis is only valid if prices break above $123. Below that, there's no reason to be long, and a neutral approach is best. If we do get that breakout, it targets $130 over the intermediate term (or the equivalent of ~2.05% on the 10-year yield).

Tomorrow is All Star Charts' U.S. Conference Call, where we'll talk more about rates and the other themes and opportunities we're seeing all over the world. We hope you can join us.

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Thanks for reading, and let us know if you have any questions!

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