By Nilay Guha – Trade with precision

All US treasuries have been in well established downtrends on their daily charts since July, with the lower term bonds (5 year and 2 year T Notes) showing some sideways movement since late August.  Do these trends have sufficient momentum to continue their downward movement or are they running out of steam?  Furthermore, there has been a lot of talk in the financial media this week about the Central Banks.  In spite of a fair amount of speculation to the contrary, the Federal Reserve has decided to keep interest rates unchanged.  Given the sensitivity of bonds to interest rate changes it would be interesting to see how US Treasury debt instruments have behaved in the lead-up to the Fed’s announcement, as well their outlook in the near term.  Let us take a look from a technical perspective to see what the analysis throws up.

A look at the T-Bond daily chart above shows a downtrend, where we can see prices pulling into the sell zone between the 10 and 20 period moving averages.  The moving average geometry is good and they are in the correct order and fanning with good separation between them.  Given the bullish rejection candle after the Fed’s announcement, it would be logical to assume a continuation of the rally into the moving averages till it eventually plays out, or maybe even leads to a trend reversal.  However, both the MACD and the RSI are strongly convergent which indicates a likelihood that the downtrend may continue in the short to near term.  Furthermore, a cluster at 170.8 (shown by the grey oval in the chart above), defined by historical support/resistance and a 61.8% Fibonacci retracement level alert us to the fact that this may well be a point where the rally reverses and the downtrend continues, marking it a potential entry point in the downtrend.

The overall picture painted by the 10-year T-Note is similar to the T-Bond; and here the cluster, and therefore the expected inflexion level is at 131.8.  This is illustrated in the chart above by the grey oval. An important fact that is worth noting is that price has reversed into a new uptrend on this daily timeframe as yesterday’s candle has broken above the high formed earlier this week. 

The 5-year T-Note has been testing and retesting the 121.035 level and we can see candle compression (lower highs) being made (shown by the blue horizontal lines above) as the flat level is being tested and retested.  Although, the MACD and the RSI do show some divergence, this should play out on further retests of the flat level.  A breakout below this level of 121.035 therefore remains a strong possibility, if in fact, this level is retested again.

Again, unsurprisingly, the 2-year T-Note has a chart similar to the 5-year T-note, although the flat-level of 109.227 is not quite as precise as in the 5-year T-note, with a few false breakouts and stronger indicator divergence, in addition to a lack of candle compression.

From the analysis of these instruments, one can summarize that there is a moderate to fair likelihood of bond yields improving (i.e. bond prices falling) in the near term; after market corrections and the movements to equilibrium that are presently underway.  It is also seen that the momentum of the trend increases as one goes up the maturity ladder; from 2-year T-Notes to T-bonds.