US 10 Year Bond Yields positioned for reversal

Hi,

It’s been a bit of a “risk on” day in Asian markets with equities in particular well bid.

I’ve had a potential reversal set up in US bond yields on the watch list for a while. As outlined on the chart below we’ve now arrived at the first of a couple of points that could represent the end of the recent decline in yields.

If this was to occur and we saw a rise in US bond yields it could be a significant development for traders of most markets because it is likely to be associated with some or all of the following:

  • Reduced concerns over European sovereign risk and a reversal of flight to quality investment in US bonds
  • A move to a more normal US yield curve which may be associated with further improvements in US economic growth
  • Markets starting to look forward to a removal of monetary stimulus in the US
  • Increased inflationary expectations

Bonds are normally traded in terms of price but I’ve shown charts of a yield index here because they are a bit easier to interpret for readers not used to bond prices

The first chart below is a long term weekly chart. As you can see, 10 year yields have been confined to a large triangle pattern since the GFC.  The resistance line of the triangle was established by the February peak at around 3.77%. Yield has since pulled back into the body of the triangle.

The stochastic oscillator on the weekly chart is well down in the oversold zone suggesting that the market could have a significant reaction here to any news that pushes bond yields up (i.e. causes bonds to be sold)

US Bond 10 Year Bond Yield Index - Source: Bloomberg

The daily chart below shows that the down trend since the peak in February,has formed into an ABC correction. We have now arrived at the first of 2 Fibonacci cluster zones. If yields reject either of these clusters and bounce off them, this potentially represents the end of the correction and is a buy set up for yields (or a sell set up for bond prices)

Corrections that are partial pullbacks into a triangle formation are often favoured by traders to position themselves early for a break through the triangle resistance.

For the record, the first of the Fib clusters that we have now arrived at consists of a 50% retracement of the swing up from O to X and projects that the B/C swing will equal the X/A swing and also be 127% of the A/B rally

US 10 Year Yield Index - Daily. Source: Bloomberg

For those interested in following this set up you can trade US Bonds as a CFD on our platform

Cheers

Ric

About Ric Spooner

Over 30 years market experience - professional trader, broker, director
This entry was posted in Bonds, Market, Trading. Bookmark the permalink.

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