Is a bear market already here?
01/18/18

Look out, we have a bear (market) alert.

No, not in the stock market—in the U.S. Treasury market, which has been in a bull market for 30-plus years.

U.S. Treasury prices have been slumping (and their yields rising) for a while, but on January 9 Janus Henderson bond fund manager and longtime bond “guru” Bill Gross tweeted that a bond bear market was “confirmed,” citing the penetration of long-term trend lines in 5-year and 10-year Treasuries.1

March 10-year T-note futures (ZNH8) sold off sharply that day, ticking below 123.00 and hitting a new contract low—the latest in a series of downswings over the past few months:

March 10-year T-note futures (ZNH8), 9/29/17 – 1/17/18

Source: OptionsHouse

In the days since then, prices have etched out slightly lower lows but basically held steady, forming what was, as of yesterday, a short-term “flag” (consolidation) pattern. The market’s recent swings highlight the 10-year T-note futures tendency to wander and backfill after making a momentum move. Yesterday’s down day, though, pushed the March futures toward the lower end of the flag and the January 12 low of 122.625.

To get a longer-term perspective on where 10-year notes have been and the technical implications for where they could go, we can look at the 10-year T-note Interest Index (TNX), which represents a composite picture of 10-year note rates:

10-year T-note index (TNX), 1/23/06 – 1/17/18

Source: OptionsHouse

Because Treasury prices move inversely to yields, this chart basically represents a rough upside-down picture of the direction of 10-year T-note prices. Yields have been climbing recently after years of decline. For some additional perspective beyond the scope of this chart, the 10-year T-note yield in 1981 was as high as 15%. It’s currently a little above 2.5%.

And what may this Treasury bear market look like? In expanding on his initial Tweet, Gross on January 10 described a 10-30 basis point rise for the year—hardly a market apocalypse—driven by rising inflation, reduced global central bank Treasury purchases, and higher US budget deficits.2 But even such a modest move could mean it ain’t over for those persistent downside penetrations of support that have lately become routine in T-note futures.

Although some observers did, in fact, second-guess the proclamation of a bond bear in the absence of immediate follow-through on January 10,3 the fact that the 10-year T-note futures prices edged sideways to lower (instead of rebounding) several days after the January 9 down move may hint at a lack of bullish sentiment that could keep downside pressure on the market.

A friendly reminder: When things really go sideways in the stock market, US Treasuries tend to get a big “flight-to-quality” bump. Traders who plan on holding T-note futures positions more than just a little while need to keep that dynamic in mind.

 

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1 Marketwatch.com. Bill Gross says bond bear market ‘confirmed’ amid Treasurys selloff. 1/09/18.

2 CNBC.com. Bill Gross sees 'decaffeinated bear market' on the way for bonds. 1/10/18.

3 Bloomberg.com. Bond Traders Question the Bear Market. 1/10/18.