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” because 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 multiyear chart of the iShares 20+ Year Treasury Bond 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 (minus the 2008 spike) for several years, bond price spiked in August 2011 right alongside stock market volatility, which also notably moved bonds out of the trading range. As gravity is no stranger to the stock and bond markets, bonds ultimately lost upside momentum in the summer of 2012, which caused the TLT to correct roughly 20% since then.
However, this has simply brought the TLT back to the upper end of the longer-standing trading range in what was 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 crosswinds from central banks and economic data likely will bring about bond volatility.
The flip side of the above chart is shown below: the yield of 10-year Treasury, which has spiked sharply in recent months.
This chart looks back to the year 2000, and shows that a more “normal” yield environment in this time frame would call for 10-year notes to be trading closer to 4%. 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, in fact, or around the 6% area.
These two charts illustrate one thing: Even though bonds have fallen sharply in recent months, they’d still have a long way to drop to reach more “normal” levels.