This week's economic data suggests that inflation has not been defeated, but bonds may continue to rally despite inflation, driven by technical and quantitative factors.
Prior to last month's CPI reading I wrote on January 15th "The Case For Bonds Ahead Of CPI" where I presented the case to be long bonds in front of CPI due to a number of technical and quantitative factors, including net dealer positioning in both the options and futures markets. My theory was that even if the data came in hotter than expected, downside risk would be still limited as the market was already fully expecting a hot number and was if anything, over-hedged against bond prices.
Just as expected, the number came ever so slightly hotter than consensus estimates yet bond futures surged anyway -
In the aforementioned blog post, I said that if bonds do reverse course then we should expect to see TLT make a run to the $90 handle. That target was hit this past Wednesday which once again happened after hotter than expected economic data that morning. This time it was the ADP jobs report which showed a beat of 183k vs. 143k expected.
So in short our thesis played out accordingly - market positioning trumped the fundamentals & macro due to the fact that they were both heavily priced in already. However now we may be at a bit of a crossroad. I have closed both my TMF and /ZB long trades as of Wednesday morning as my target has been hit and we are now pressing into technical chart resistance.
Non-farm payrolls this morning showed a dip in jobs created but a jump in payroll costs and on top of that University of Michigan economic data showed a massive jump in inflation expectations as well as a major drop in consumer sentiment. This time, bonds sold off as yields rose. TLT finished the day down 65bps and perhaps more importantly the 2 year yield jumped 77bps for a 1.83% gain on an investment basis.
So has positioning re-balanced now and is this the end of the bond rally? Maybe, but let's make the case that it hasn't.
We did hit technical chart resistance as well as our proprietary dealer level at $90 on TLT so yes it's no surprise that price has stalled here. However despite having both Non-farm payrolls and Univ. of Michigan data come in with far hotter than expected readings this morning, /ZB (30 year futures) managed to not only finish off of the lows of the day but it closed well above the breakout base from this past Wednesday.
To be fair and give context, the short end end of the curve (/ZT) was weaker and it did lose the breakout level by Friday's close as the yield curve flattened out more. So bonds weren't necessarily strong across all durations as the current inflation data is seen as more impactful to the short end.
That said, as far as the long end is concerned rates did not move as much which suggests that while there are still inflationary pressures in the short to medium term, long term rates are still anchored more or less to where they are for now. For vehicles like TLT, /ZN, and /ZB, this could just mean that we're simply about to see some sideways consolidation beneath technical resistance as opposed to a clean rejection which could in turn set up another leg higher in due time.
If the futures on the long end can carve out a technical base here, they could complete a measured move from the current breakout level up to the 200 day moving average.
For TLT, this would get us roughly into the 200 day moving average around the $93 handle.
To further support this price target we can see that the $93 handle lines up exactly with our proprietary dealer exposure level for the February monthly expiry on 2/21/25.
Lastly, despite the recent rally in TLT, bond shorts are still sitting at record highs which again, will make it difficult for long end treasuries to sustain any kind of selloff even on stronger than expected economic data. Credit: @barchart (X.com)
Bottom line - If the long bond can build a technical base after this most recent rally, then there is a strong possibility that we could see a second leg up towards the $93 handle on TLT in the coming weeks. This would take rates on the 10 year down to around the 4.20% - 4.25% before the next tradeable bounce level.
Full disclosure - I closed both of my bond trades that were opened in mid-January (Long TMF shares, Long /ZB Futures) on Wednesday 2/5 and am currently holding no position but would consider re-entering longs based on certain technical and quantitative factors, many of which are found in the Essentials Course, and/or our Active Trader service.
📖Read more on how I came to the the original trade thesis - 💰How To Recognize (And Profit From) Market Manipulation 👉The Case For Bonds Ahead Of CPI 🔐For access to premium trading content including swing trade alerts & live day trading room visit 👉 - https://www.carnivoretrades.com/
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