Bond breakdown?

… and inflation is coming.

I could end the post with this. For some this could be the news, for others maybe not so much. I wrote a post last year But aren’t bonds supposed to only go up? Like then also now I was chatting to a friend recently and he was very surprised when I said I’m expecting inflation to pick up.

Most people think we’ll stay in this disinflationary and low rates environment forever. But we’re getting inflation signs everywhere. For example, the housing market is strong in most cities (in Europe) and it seems it could stay that way for a while. There are some other big infrastructure projects under way. Food prices are slowly but steadily rising. Huge pressures on salaries starting to emerge. And I believe oil prices could rise to $100 in the near future too (see here)!

So, let me start with a monthly chart of 30 year yields $TYX. TYX is in a steady down trend. Hard to argue that. But what I would argue is that they’re trying to break above through a falling trend line and a resistance at 32.50. And start a new up trend.

The next one is a very similar, but a cleaner chart. Its $TNX and it’s showing 10 year interest rates on a monthly chart.

Again, very similar conclusions, but I’d argue it’s already breaking out higher. A confirmation would be a close above 31.15.

And now we get to bonds. They’re inversely correlated to yields. And similar to the disinflation narrative not many people believe they can go down. There’s still a perception that they’re the best hedge against recessions. And man, I’ve seen so much coverage about the next recession it’s already driving me crazy. So many people are already speculating on what might cause it, when it will happen and how to prepare for it. I bet the same people are buying treasuries every time they get a chance.

So, the next chart should be telling. It’s a weekly chart of 20 year treasury bond ETF $TLT.

We already saw a nice little break below 118, which could now take the price to a crucial support at 116 and should it break down lower, then the price will have a clear path to 101! That’s 16% lower. That’s a lot if you ask me. And this could shake the markets quite a bit.

We see a very similar situation in 10 year treasury note futures. 

Should it get below 118 then it could quite likely continue towards 114 at least. But a much bigger downside risk or downside potential is in TLT.

Bonds have done very much as expected in the past year. I don’t know whether or not TLT will break below 116 and if it will when this might happen. But based on all the signals I’m getting I wouldn’t be surprised if it happens rather sooner than later.