Recession fears have taken hold in the bond market after the breakdown in U.S.-China trade talks, lifting the iShares 20+ Year Treasury Bond ETF (TLT) to the highest high since the 2016 presidential election. The CBOE 10-Year Treasury Yield Index (TNX) has dropped to a 21-month low at the same time, and the 10-year Treasury now pays less than the three-month Treasury Bill, signaling yield inversion that is unnerving long-time market players.

It's tough to predict an imminent recession when U.S. economic data is firing on all cylinders, but as we learned in 2018, America's growth trajectory is highly dependent on free trade. While last year's trade fight between superpowers generated a few headwinds for consumers and employers, tariffs have now risen to 25% while President Trump is preparing a duty list that includes every Chinese import.

Long Bond ETF Surges to 2016 Levels

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

The iShares 20+ Year Treasury Bond ETF sprang to life in the low $80s in July 2002 and eased into a trading range between $80 and $100. A parabolic spike during the 2008 economic collapse reached $123 before failing the breakout and dropping back into the range. The fund had better luck during a 2011 buying wave, completing a round trip into the prior decade's high a few months later.

The fund has carved a choppy and volatile pattern in the past eight years, grinding out a series of slightly higher highs into July 2016's all-time high at $143.62, while downturns since 2015 have ended near the $115 level. A breakdown through that trading floor in November 2018 trapped trend-following bears, ahead of a strong rally impulse that coincided with higher first quarter equity prices.

However, bonds surged higher while stocks fell after trade talks ended, with the rally mounting the 2017 high and nearly filling the November 2016 gap between $127 and $132. Fortunately for equity watchers, this price level also marks steep resistance, suggesting that the fund will soon turn tail and drop back below $125. That downturn may coincide with a relief rally in stocks that shakes out a growing supply of short sellers.

10-Year Treasury Yield Nears 2-Year Low

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

The CBOE 10 Year Treasury Yield Index has been ticking lower in a massive downtrend for nearly 38 years, posting an endless series of lower highs and lower lows. It hit a new low near 1.50% in 2012 and bounced strongly, but the uptick failed just above 3.00% in 2014, well below the 2007 peak above 5.00%. A 2016 test found willing buyers, triggering a two-year rally that reversed at the 2014 high in the fourth quarter of 2018 (red lines).

The six-year rectangle pattern predicts that 10-year Treasury yields will eventually test 1.50% for the third time, while the multi-decade downtrend raises the odds for a breakdown. On the flip side, a breakout above 3.00% is now required to defuse the long-term deflationary outlook. Just keep in mind that this instrument builds long-wave price patterns that often take months or years for significant price action to develop.

The monthly stochastics oscillator has dropped into the oversold zone for the fifth time since the 2008 crash and has now hit the most extreme technical reading since 2012. That's a contrary buy signal, but the three-year pattern places current action at the 50% retracement of the 2016 into 2018 uptrend, still above strong intermediate support at the .618 retracement, which is aligned with the 2.00% level. That raises odds for a climactic selling wave that dumps yields to even lower lows.

The Bottom Line

The long bond ETF has reached resistance near $130 after a powerful rally wave and could reverse in the coming sessions even though the 10-year Treasury yield may carve a final leg down to 2.00%.

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