More Holes Appear in the Treasury Support Dyke

• Posted by Greg Harmon
• on September 9th, 2016

Shorting US Treasuries may be the most overcrowded trade of the year. In fact for 2 years. Ever since the Fed announced an end to QE there have been calls to short Treasuries from professionals all the way down to my neighbor Matt, a librarian. And they have all been dead wrong. But lately there have been some holes popping up in the support behind Treasuries. They continue to get plugged at just the right moment. But what is we run out of plugs?

The chart below shows the US Treasury ETF price action since the announcement of the end of QE. There was an initial move lower that lasted about a week before the market pushed bonds to new highs at the beginning of 2015. Then a pullback set in. Bonds pulled back to their End of QE announcement levels. And they stayed there for most of 2015. Stuck between rates are rising and rates will never rise.

2016 came and the buyers of bonds won the fight. Bond prices raced higher for 6 months, making a new all-time high in the beginning of July. Since then consolidation has set in the form of a symmetrical triangle. This lasted for 2 months until a break to the downside Thursday. This was the first big hole in the dyke that may not be able to be plugged. A solid move and close below 137 this week will start the unraveling. The water will flood out.

The last remaining question will be how far it will go. Will it be the 200 day SMA at about 132 near the top of the prior consolidation triangle? or the bottom of that triangle at 128. Or maybe even 120, the cent of the descending triangle before that. You will know it is the bottom when both Jeff Gundlach and Bill Gross publicly say that they are shorting Treasuries. I do not know when it will be. Only that a move under 137 Friday will be a big catalyst.

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