Bonds Look Due for Another Drop

Ten-year Treasury-bond yields rose sharply — in other words, bond prices fell sharply —from May to September as investors prepared for the Fed taper that never happened.

Following that move, I wrote to you on December 04, 2013, explaining the three technical indicators that suggested bond yields would rise in the near term. I’ve marked that date with a vertical white line in this updated chart of 10-year Treasury bond futures:

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Remember to invert your brain when you’re thinking about yield. Falling bond prices equals rising bond yields.

Those three technical indicators proved very helpful in forecasting a short-term fall in bond prices, which dropped lower into the year’s end as the 10-year yield rose from 2.77% to 3.03%.

But that move was short-lived.

As you can see in the chart above, bond prices fell for only two weeks before reversing higher. Currently, we’re right back in the Fibonacci retracement zone (marked with horizontal white lines) that acted as significant resistance late last year. As such, we should watch for this current price level to act as resistance once again, eventually pushing bond prices lower once more.

So while the long-term trend still points to deflation, be on guard for a short-term rise in interest rates and a short-term drop in bond prices.