The CBOE 10 Year Treasury Note Yield (TNX) rallied to a four-month high on Thursday, while the iShares 20+ Year Treasury Bond Fund (TLT) fell to a four-month low, adding to speculation that the American economy is headed for higher interest rates and inflation. The financial media has picked up on this theme, proclaiming that the bond market is "waking up" to additional stimulus spending, whether it happens now or after the election.

Key Takeaways

  • The 10-year yield posted an all-time low in August and reversed.
  • The 30-year bond posted an all-time high in August and reversed.
  • Both instruments have to cross major obstacles to confirm trend changes.
  • Observant market players will be watching 0.95% on the 10-year yield and $150 on the bond fund.

The 10-year yield posted an all-time low in August and has been ticking higher since that time, closing at 0.848% on Thursday, but 200-day exponential moving average (EMA) resistance will come into play when the uptick reaches 0.915%. On the flip side, the bond fund just sliced through that support level, closing below the moving average for the first time since March 2019. Short-term price action may be instructive in this regard because a reversal and strong rally followed that downtick.

The most likely scenario for the bond market between now and 2021 is three-fold. First, yields move higher on the expectation that trillions will be poured into the U.S. economy. Second, that impulse fades quickly because it's already being discounted by bond traders. Third and most importantly, the bond market then take its clues from economic statistics, which in turn will be driven by COVID-19's lingering impact and the tone set by the next administration.

Yield refers to the earnings generated and realized on an investment over a particular period of time. It's expressed as a percentage based on the invested amount, current market value, or face value of the security. It includes the interest earned or dividends received from holding a particular security.

Treasury Yield Monthly Chart (1981 – 2020)

Chart showing the performance of the CBOE 10 Year Treasury Note Yield (TNX)
TradingView.com

The instrument posted an all-time high at 15.84% in 1981 and entered a historic downtrend, carving more than 20 years of lower highs and lower lows into 2012, when it bottomed out near 1.50%. Yields then eased into a broad rectangular pattern, bounded by the low and resistance at 3.00%. Price action tested 200-month EMA resistance for the first time in 14 years in 2018 and reversed, settling at support for the third time in 2019.

Yields broke down during the first quarter of 2020, descending to an all-time low at 0.40% in March, and entered a narrow trading range with short-term resistance at 0.96%. A descending highs trendline is dropping into this level, which has also aligned with 200-day EMA resistance. As a result, a strongly positive catalyst may be needed to mount this barrier and head into much stronger resistance at the eight-year breakdown near 1.50%.

Bond Fund Monthly Chart (2002 - 2020)

Chart showing the share price performance of the iShares 20+ Year Treasury Bond Fund (TLT)
TradingView.com

The bond fund traded in a 17-point range between 2002 and 2008, when it broke out in reaction to the developing economic collapse. The rally topped out at $123 at year end and turned tail, failing the breakout into the new decade. A subsequent uptick into 2012 posted a new high at $132, marking the second point in an ascending trendline that ended rallies in 2015, 2016, and 2019. The pandemic powered a breakout above that formidable barrier in the first quarter of 2020, reaching an all-time high near $180 in March.

A selloff into June ended at breakout support and the .382 Fibonacci rally retracement level, yielding a bounce that posted a lower high in August. The fund has been losing altitude since that time, closing below the 200-day EMA on Thursday. In turn, it looks like the stage is now set for a second test at major support near $153. Round that off, and common sense dictates that it will take a decline through $150 to confirm a failed breakout that exposes much lower levels.

A retracement refers to the temporary reversal of an overarching trend in a stock's price. Distinct from a reversal, retracements are short-term periods of movement against a trend, followed by a return to the previous trend.

The Bottom Line

Yields are headed higher while bonds are losing ground, but prevailing 2020 trends will remain in force until these instruments break through major barriers.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.