A Technical Warning On Bonds

This article describes a technical market factor that could lead to a sharp decline in bond prices in the near future. It isn’t based on fundamental factors, and it doesn’t argue that the decline in bonds will be long-term. But it says historically recent trends mean investors should expect bonds to break out of their recent trading range and decline soon.

His analysis shows that in the last four out of five periods when the 10-year yield was bound in a similarly restrictive range for 13 to 14 straight days, a yield jump of 10 basis points or greater soon followed. That means bond prices are primed for a fall as yields pop, by his estimation.

Lyngen acknowledges that the current period of relative quiescence may partly be tied to the sort of lackadaisical action typically associated with summer doldrums, as traders leave for vacation. Yet, the listless Treasury moves, despite potential trade conflicts, inflation concerns and a Fed showing few signs of retreating from its current rate-hike path, (all factors that should drive sharper moves) suggests to the BMO strategists that the bond market is “coiling” for an ugly selloff.