Are U.S. sovereign bonds in a blow-off phase? Tough to say, but they have had quite a rally.
Yields on both 30-year bonds and 10-year notes this week made new all-time lows. Post-Brexit, demand for long bonds from major countries, including Japan and Germany, has gone through the roof. The U.S. is no exception.
Ironically, as low as Treasury yields are, they compare favorably versus, let us say, Japan’s and Germany’s. On Wednesday, 30- and 10-year Treasury yields fell to record lows of 2.11 percent and 1.34 percent, respectively, with the latter slicing through the prior low of July 2012 (Chart 1).
Not surprisingly, TLT, the iShares 20+ year treasury bond ETF, has rallied big. In fact, parabolic would probably be the right word to describe the action of the past several weeks. Since late May through the Thursday intra-day high, it rallied 11.5 percent. Huge! In the process, it took out $133.5-$134 a month ago. This resistance stretches back nearly a year and a half. Since that breakout, TLT has gone parabolic.
Some signs are appearing as if fatigue is setting in, or about to. Tuesday, it gapped up big, and has gone sideways since. This is not bad in and of itself. But given how stretched overbought conditions are, continued sideways action at best or downside pressure at worst looks like a decent bet near term. Although in the medium- to long-term, things might be different. As Bill Gross, of Janus Capital, says, “I think the 10-year has the chance to go to 1.25 percent.”
Indeed, with rates as low as they are, how low they could possibly go when the next recession hits is an open question. And recessions are as certain as death and taxes. It is just a matter of time.
That said, for now, odds are decent TLT ($142.55) at least goes sideways. If nothing else, just for technical reasons.
In this respect, rather than going short outright, use of options probably makes sense. Weekly July 15th 143 calls bring $1.18. Naked calls can be risky unless one is willing to go short if assigned. In this case, it is a potential short at $144.18. Unassigned, it is a nice premium to keep.
Thanks for reading!
