U.S. Treasuries are breaking out of chart patterns to the upside, chasing municipal and corporate bond ETFs that have been moving higher for some time. Treasury bonds, of varying durations, fell in late 2016, but then leveled off in December. In March the Treasury bond ETFs fell again, but found support once again and rallied. April has seen Treasury bonds break above short-term resistance and head toward the upside profit target.

The iShares 20+ Year Treasury Bond ETF (TLT) hit a low of $116.80 December, and then had another low of $116.49 in March. This created a descending triangle pattern with a breakout point at $122. The price has already broken out, trading at $124.02 as of Apr. 19. While the long-term trend looks to have reversed to the downside, the upside breakout from the four-month triangle signals a short-term rally. Based on the size of the triangle ($123.14 - $116.49) added to the breakout point, the upside target is $128.65. A drop back below $122, and especially below $120, warns of a false breakout and a potential continuation of the downtrend.

TLT breaking out of triangle pattern

The iShares 7-10 Year Treasury Bond ETF (IEF) bottomed at $103.43 in December and put in a higher low at $103.69 in March. Resistance near $106 was tested three times during this period, forming an ascending triangle. The price has now broken through triangle resistance, closing at $107.10 on Apr. 19. Given the strong overall sell-off over the last few months—that erased all gains going back to late 2015—the long-term trend has shifted to the downside, but there still could be more upside in the short-term. The upside target, based on the breakout, is $108.89. As the price moves into the target area, or above it, the chance of another sell-off increases. If the price falls back below $106, and especially below $105.35,  the upside breakout was likely false and a move back toward the $103.50 region, or lower, is expected.

IEF breaking out of triangle pattern

The iShares U.S. Treasury Treasury Bond ETF (GOVT) moved in an expanding range between December and March, ultimately putting in highs and lows at $25.17 and $24.72, respectively. On Apr. 13 the price broke out of the pattern, signaling a further short-term rise. The upside target is $26.65. Over the longer-term, another decline is expected as the dominant trend has shifted to the downside. If the price drops back below $25.15, and especially below $24.98, watch for continued selling into the $24.75 region, or lower.

GOVT breaking out of pattern to upside

The Bottom Line

U.S. Treasury bonds of varying durations have broken out of chart patterns to the upside. This indicates a short-term rally, but the overall bias remains bearish. Based on the strong wave to the downside over the last several months, the rally is likely just a pullback, with the price expected to fall back toward recent lows in the coming months.

Disclosure: The author doesn't have positions in the ETFs mentioned.

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