On September 13, I asked, “Will the bearish trend in bonds continue?” In that Barchart article, I wrote:
I expect the bearish trend in bonds to stabilize. While a lower low is possible, I believe it would be marginal, and bonds will find a comfortable range around the current level. Meanwhile, issues that may derail stability in the bond market are a geopolitical event or significant U.S. credit downgrade that causes other governments to liquidate their U.S. government debt securities holdings. A flight-to-quality could cause a rally. However, I favor stability over the coming months as the trajectory of rate increases slows.
I was wrong. On September 13, the nearby December 30-year U.S. Treasury Bond futures were at the 119-07 level after falling to 117-18 in August, the lowest level since February 2021. The selling has continued, pushing the bonds to a more than decade-and-a-half low in early October. Rising interest rates choke economic growth and weigh on other asset classes as fixed-income products become more attractive. However, the mark-to-market consequences can get ugly.
Bonds plunge to multi-year lows
The U.S. 30-year Treasury bond futures fell to the lowest level in over a decade-and-a-half last week.
As the chart shows, the long bond futures fell to 108-29 last week, a level not seen since August 2007. The trend in bonds has been lower since the March 2020 high.
Bonds rallied in early 2020 as the pandemic gripped the worldwide financial market, and the U.S. flooded the markets with unprecedented liquidity. The central bank pushed the short-term Fed Funds Rate to zero, and the quantitative easing policy sent rates lower further along the yield curve. Since then, rates have risen, picking up upside steam from 2021 through 2023. In 2022, the Fed shifted its monetary policy path to tightening credit. The Fed Funds Rate rose to 5.375%, and quantitative tightening to reduce the central bank’s swollen balance sheet sent rates soaring further along the yield curve to combat the highest inflation in decades.
Meanwhile, geopolitical turmoil has caused foreign selling of U.S. government debt securities. Moreover, rising U.S. debt has weighed on bonds as it threatens the full faith and credit of the United States.
The latest jobs data could mean more Fed hikes are on the horizon- The Middle East could cause a bounce
On Friday, October 6, the market expected the economy to add 170,000 new jobs in September. The jobs numbers came in at 336,000, increasing the odds of another Fed Funds 25-basis point interest rate hike at the next FOMC meeting. Unemployment stands at 3.8%. However, wages only rose 0.2% for September and 4.2% from last year, compared to forecasts for a 0.3% and 4.3% increase. The wage data complicates future monetary policy decisions. The robust employment data gives the Fed room to boost the Fed Funds Rate by another 25 basis points before the end of this year. However, the wage data could cause the central bank to remain at 5.375%.
On the geopolitical front, the tragic events in Israel that increased worldwide tensions could cause a rebound in the bonds from last week’s sixteen-year low. While the bond market was closed on Monday, October 9, the long bond futures were higher over the 111 level.
The long bond futures’ next downside target
As the bearish trend continues, the next downside target is the June 2007 technical support.
The chart dating back to the 1970s shows support is at 104-31. Below there, the May 2004 103-02, the March 2002 97-16, and the January 2000 89-01 lows are downside milestones for the current bearish trend.
Bull and bear markets tend to extend to irrational, illogical, and unreasonable levels before reversing. Since the trend is always your best friend in markets, the bearish path of least resistance in the long bond futures that has become a falling knife has the potential to challenge the technical support levels from over two decades ago. However, the volatility situation in the Middle East could cause a bounce over the coming days and weeks as the U.S. bond market and the U.S. dollar have historically been a haven of safety in times of global turmoil.
Mortgage rates soar- Trouble in the housing sector
In late 2021, U.S. 30-year fixed-rate conventional were below 3%. In October 2023, they have risen to nearly 8%, excluding many potential new buyers and renters from home ownership. Meanwhile, with most existing home buyers locked into mortgage rates far below the current level, the inventory of existing homes has virtually dried up, keeping prices at sky-high levels.
Time will tell if rising mortgage rates eventually weigh on home prices even as existing homeowners do not sell. The low rates before 2022 have distorted the historical relationship between home prices and current mortgage rates. If interest rates continue to soar, rising mortgage rates could choke the demand. Meanwhile, rising construction financing rates could eventually cause new home building to decline while sales of existing homes remain low, causing an even more significant home shortage.
The low rates of the past years and the sudden increase since 2021 could continue to cause significant distortions in the housing market.
Ugly and sloppy action in the highly liquid TLT ETF
On September 13, the iShares 20+ Year Treasury Bond ETF (TLT) was at the 93.91 level after trading to an eleven-year low of $91.85 in October 2022.
The long-term chart illustrates TLT’s decline to $84.06 per share on October 6, the lowest level since July 2007, as the ETF follows the long bond futures lower.
While the war in Israel and the potential for a widespread Middle East conflict could cause U.S. bonds to recover, the trend remains bearish. Critical technical support for TLT is at $80.51, the May 2004 low. Even the most aggressive bearish markets rarely move in straight lines, but the bond bear is approaching its fourth anniversary, with the trend picking up steam over the past weeks. The recent slide could mean a bounce is on the horizon. Fighting the bear is a contrarian approach that requires a prudent risk-reward approach and discipline to guard against getting financially mauled.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
