There is little talk now of the ‘conundrum of interest rates’; in the not so distant past, the yield curve was indicating a recession and ‘all’ were puzzled at how this could be, given the ‘buoyant’ economic conditions. Now only few are commenting on the state of the long-term yields, viz, the 30-year bonds.
Figure 1 shows the Real US Treasury Monthly Average Yields (20 year constant maturity). I treat a penetration of the ‘0′ line as warnings to buy or sell. For example, a penetration above ‘0′ from below would be a buy warning. Since yields are inverse to future (buy yields, sell futures), a buy signal on this chart is sell signal on the 30-year Bond futures.
Figure 1 20-year Constant Maturity
Figure 2 shows 12-month (yearly trend) Barros Swing on the 30-year Bonds (basis CSI-Data Perpetual). I have imposed linear regression bands (one form of ‘trend channels’ I use) of 2 and 3 standard deviations. I treat a penetration of the 3rd standard deviation as a possible sell setup.
I treated the penetration of the 3rd standard deviation and subsequent rejection of the 141.72 price as a sell signal. This signal will be operational unless we see a 78.6% retracement of the move 141.79 to 123.39. Having missed the first breakdown, I was looking for a return to the 2nd standard deviation band (red line) for a setup and sell on the daily time frame.
Figure 2 12-Month 30-Year
Figure 3 is a daily chart of the 30-Year Bonds (basis CSI-Data Perpetual). I treated the spike as a ’surprise event’ i.e. an event that will see prices return to value. This is akin to the co-ordinated intervention in the FX markets that occurred periodically yesteryear. The market inevitably returned to ‘normal’ levels after the intervention. For this reason, I sold Bonds the next day.
Figure 3 30-Year Bonds.
To confirm my scenario we need to:
- hold below the 78.6% retracement level, 137.56 (basis CSI-Data Perpetual) and
- accept below the prior Primary Sell Zone (120.55 (basis CSI-Data Perpetual), See Figure 4))
Figure 4 13-week 30-Year Bonds
Given the US Government constant attempts to ‘rescue’ the US economy, we can expect to see the gyrations we saw in Tuesday’s trading where in less than 30 minutes, the Bonds went from 126.91 to 129.16. You can put this volatility in perspective when you consider that the ATR for the 30-years is 1.77 with a standard deviation of .77. In other words, we went mean +1 in 30 minutes.
Another way of looking at it is to compare move with the 30-min ATR (.36). In short, the event on Tuesday was a ”Black Swan”.
I expect to see many ‘Black Swans’ as the Fed and US Government attempt their rescue. The moral is, be careful where you place your stops.
Refer this blog post to a friend or colleague…
