The bond market has reversed at the long and short ends after Federal Reserve Chairman Jerome Powell told Congress on Wednesday that governors will do "whatever it takes" to maintain the decade-long economic expansion. This so-called "Fed put" has increased risk appetite, triggering a modest flow of capital out of bonds and into equities, as evidenced by this week's all-time highs in the S&P 500 and Nasdaq 100 indices.

Many fixed-income instruments hit new highs just before July 4 and gapped down into the weekend, adding to losses after Powell's mid-week speech. This price action suggests much lower prices and higher yields in the coming weeks, potentially offering a pullback buying opportunity for investors seeking safe haven from growing international tensions that may affect U.S. growth well into the next decade.

Long Bond Reversal

Chart showing the performance of the iShares Barclays 20+ Year Treasury Bond ETF (TLT)
TradingView.com

The iShares Barclays 20+ Year Treasury Bond ETF (TLT) came public in 2002 and eased into a 20-point trading range that stretched between $80 and $100. It took off for the heavens after the October 2008 crash, stalling at $123 and turning tail in an equally ferocious decline that failed the breakout in 2009. The fund completed a round trip into the prior high in 2011 and broke out in 2012, topping out at $132.21, marking a price level that is still in play nearly seven years later

Bullish price action added points into July 2016's all-time high at $143.62, while sell-offs between 2014 and 2018 found support near $116. The decline starting in August 2018 broke that trading floor and hit a four-year low in November, marking a selling climax and buying opportunity, ahead of steady upside into the third quarter of 2019. The monthly stochastics oscillator has lifted in lockstep with price and has now reached the most overbought technical reading since 2010.

The rally stalled in June after mounting the .618 Fibonacci retracement level of the 2016 into 2018 decline and has now reversed, dropping into the 50-day exponential moving average (EMA) for the first time since April. It could bounce at this support level and draw a broader topping pattern or head straight into a test at new support between $124 and $126. Bulls need to hold that price zone at all costs or risk a failed breakout that exposes a trip into the old trading floor at $116.

10-Year Treasury Yield Bounces at 2.00%

TNX
 TradingView.Com

The CBOE 10-Year Treasury Yield Index (^TNX) has been losing ground within a historic decline that is now entering the 39th year, carving an unbroken string of lower highs and lower lows. It fell to 1.50% seven years ago and turned higher, but the rally reversed near 3.00% in 2014, failing to reach the highs posted between 2007 and 2011. The index sold off to 2012 support in 2016 and reversed in a two-year uptick that ended within a few clicks of the 2014 high in October 2018.

The decline since November has reached long-term trendline support at 2.00%, while the six-year rectangle has confined yield between 1.50% and 3.00%, predicting that it will head lower in the next year or two. Conversely, a rally above 3.00% may finally end the endless string of lower highs and signal the first uptrend since the 1970s. Just keep in mind that this instrument carves slow-moving price patterns that can take months, years, or decades to generate significant trends.

The monthly stochastics oscillator has dropped to the most extreme oversold technical reading since 2010, setting the stage for a strong bounce that may have trouble clearing 2.50%. All bets are off if the decline breaks the red trendline because that's likely to coincide with new lows all across the yield curve. However, for now at least, bears are back in control of bond prices and likely to target longs who have overstayed their welcome.

The Bottom Line

The long bond fund has turned lower at resistance after an impressive rally, while the 10-Year Treasury Note has bounced at 2.00%, setting the stage for lower bond prices and higher yields.

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