As we are in the midst of a huge week of economic data and central bank interest rate announcements, I thought it would be an appropriate time to look at bonds through the lens of a stock market like technical analysis. I say stock market like analysis as I am not looking at steepening/flattening of the interest rate curve, nor considering many of the other factors that make fixed income analysis what it is. On the following two charts I am merely considering price, or yield action…remember, yield and price have an inverse relationship.
First, let’s look at a multi-year chart of the iShares 20+ Year Treasury ETF (TLT), which I will use as a proxy for the medium to long-term range of Treasury-issued fixed income paper. After trading in a somewhat orderly range (ex the 2008 spike) for several years, in August 2011 as stock market volatility spiked, so did the price of bonds, which also notably moved them out of the trading range. As gravity is no stranger in the stock and bond markets, bonds ultimately lost upside momentum in the summer of 2012, which caused the iShares 20+ Year Treasury ETF (TLT) since then to correct roughly 20%. This however, has simply brought it back to the upper end of the longer-standing trading range in what was is a classic mean-reversion move that I think could continue toward at least the $100 mark over time. This is not an immediate-term call, as this week’s howling cross winds from central banks and economic data likely will bring about volatility to bonds.
The flip side of the above chart, is the below picture of the yield of 10 year Treasury notes, which has spiked sharply in recent months. This chart looks back to the year 2000, and shows a more ‘normal’ yield type environment in this time-frame would call for 10 year notes to be trading closer to 4.00%. If we were to zoom out even further on the below chart, the mean would also be higher..as much as 200 basis points higher, i.e. around the 6.00% area.
With these two charts I hope to have showed that even though bonds have fallen sharply in recent months, for them to reach more ‘normal’ levels, they still have far to fall.