What the TLT Chart is Telling Bond Traders

(July 31st, 2012) Last friday the 30 year treasury yield jumped 13 basis points (.13%) from 2.50% on thursday to 2.63% on Friday.  This is a large move in the treasury market and one that prompted Bill Gross to make the following comment on twitter yesterday:

Large moves such as these tend to attract the trading community’s attention, so we thought we would take a look at a chart to see what traders might be watching.  Many traders who follow the treasury market do so through the TLT ETF, a bond fund which tracks the performance of long term government bonds.  Below is a daily chart of the price action in the TLT from the middle of 2008 through today.

So what might bond traders learn from this chart?

The 123.26 level where I have drawn a line on the chart was acting as significant resistance, which despite multiple tests during the last quarter of 2011 held a lid on rising prices until April of this year.  Should the market continue to sell off as it did friday, then this is really the first strong area of support on the chart.   This means two things:

  1. The TLT could fall a lot further from its current level before finding support from buyers in the market, at least from looking at the charts only.
  2. Even if the TLT does fall dramatically from here, until it breaks through the 123.26 support level, the uptrend we have been in is still very intact.


Is there a trade here?

In my opinion market is too overbought here to initiate a new long trade.  However, I would also not want to be short here because I don’t like stepping in front of a freight train either.  Taking these two things into account if I were looking to trade the TLT I would wait for a pullback into the 124 area and look to get long there for a resumption of the uptrend.

How about you?  Let us know what you think in the comments section below.  

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Comments

  1. Mark says

    Can you explain in simple terms how this affects those of us invested in Corproate Bonds, specifically the AGG? Thanks

  2. Learn Bonds says

    Hi Mark,

    Thanks for the comment. For investors I don’t really think this chart is too relavent as in my opinion investors should really be focused on the long term. With this being said I think that the message here for the AGG is that we could see a further fall in the value of the ETF which is simply more of a correction of its recent strength rather than a reversal of the trend.

    So in simple terms although we may see a further selloff in the TLT and other bond ETFs like the AGG, I don’t think its time to hit the panic button yet.

    Hope that helps.

    Dave

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