For virtually all of 2021 (and much of Q4 2020), we’ve been tracking an uptrend in Treasury yields. As the overall move grew to a size rarely seen in the past few decades, we were increasingly eager to see a token correction for technical reasons (i.e. selling sprees can hibernate or straight up die of old age). The anticipation peaked with a terrible month-end in March and hopes for a better month as April started strong.
So far, April has delivered on 100% of its promise to be a better month. It would only have taken 2-3 weeks of sideways-to-slightly-stronger momentum in bonds to classify the move as the corrective consolidation we were looking for. That much is a done deal. Now we can move on to asking the next series of questions about our newfound resilience.
1. How much longer can these good times last? It’s the market! One can never be sure. Best case, summertime seasonals suggest a yield bottom in June/July/August. That’s happened in 6 out of the past 10 years with all but one of those examples representing corrections from big sell-offs that ended between December and April. Worst case, this could end up being like mid-2013 when it looked like yields had turned a friendly corner in July only to press to higher highs in Aug/Sept (but replace July/Aug/Sept with Apr/May/June). Bottom line, it could almost already be over, or it could last 2-4 more months if we assume past patterns will be repeated. If patterns aren’t repeated, we’re forced to retreat to the analytical hidey hole of “it depends” (on covid and the economy, in the current case).
2. How much better could things get? We’ve already talked about how much worse things could get, with key levels like 1.95% and 2.4% representing the two most important overhead ceilings in the biggest and baddest of pictures. But how about the other side of the coin? In answering this question, we definitely have to lean more heavily on if/then scenarios. If much of the recent sell-off was anticipatory (and the paradoxical reaction to this week’s Retail Sales data does indeed make a case for that), then pre-covid all-time low yields in the 1.3% range wouldn’t be a crazy thing to discuss.
But since we’re starting the day almost 30bps higher than that, let’s focus on a few more immediate rally targets. After all, there’s still no guarantee we’ll see any of them. On the lowest end, 1.45% is the bottom of the “hitch” zone that we first discussed months ago. That’s still a relevant technical target. 1.50 and 1.525 are more immediate resistance levels.
3. What should we watch out for? If you want to play this from a bullish/optimistic stance, keep an eye on the new downtrend (yellow lines). The rally got a bit ahead of itself yesterday but returned to the trend by the close. A retracement to the upper boundary would be tolerable as it would only be about 7bps of weakness from here.
As far as today is concerned, specifically, we may not be able to glean much. It’s more of a placeholder day in the grand scheme of things (based on the econ/event calendar). We’ll also need to take any big moves with a grain of salt as pre-weekend position squaring has given the wrong signal about the ongoing rally in each of the past 2 weeks.