Is today the day we break the “key technical level” at 2.82? Spoiler alert: you shouldn’t care and it doesn’t matter. I’m sorry if this is disillusioning or confusing. I spend a fair amount of time talking about technicals and various lines in the sand. It might leave you with the impression that some future move is more likely if we can just get past a certain hurdle.
But technical levels aren’t as simple as “glass ceilings” for bond prices. They’re much more like mile markers that simply let us know where we’re at on any given journey. If you’d like to bask in more long-winded definitions and discussions, here they are:
Basic Concepts of technical analysis
Pivot Points, Key Levels, Floors, Ceilings, Etc.
Trust The Technicals?
The bottom line is that 2.82% gives us something to watch and something to talk about in a market that really doesn’t give a damn about 2.82% or whether or not you have anything to watch or talk about. Bond trading levels are being determined by forces far beyond the control of investor sentiment. They’re not like stocks and never will be in that regard. We can’t watch a particular company’s performance. We can’t look at that company’s financials, management philosophy, earnings, product development, etc. and determine that other investors will probably buy more of its stock.
For our purposes, the entire bond market is a single company–the largest in the world. It underwrites loans for the biggest borrower in the world (US government), and it serves as the benchmark for everyone else’s borrowing rates. Fiscal and monetary decisions that have absolutely nothing to do with the performance of that “company” can drastically alter trading levels.
For example, when Trump started spending more money and issuing more debt, yields had to rise due to supply and demand (higher supply = lower prices = higher yields). Unlike a big corporation’s stock taking a hit due to some aspect of its performance, that spike in yields had/has nothing to do with the perceived investment quality of Treasuries. This is referred to as a “supply/demand technical” and just to confuse you, it has nothing to do with technical analysis or technical levels.
Ah yes, we were talking about technical levels… The above rant is really just a friendly reminder to not get too caught up in them. It’s August still. This is prime time for bonds to be giving absolutely no clues and taking absolutely no cues. This is their vacation. 2011 was really the last year where something was truly happening for bonds in August. Apart from that, we’ve only seen modest extensions of springtime moves or indecision.
This year is an indecision year. Italy helped push back against the springtime trend and trade war fears perhaps solidified that. We’ve been in a big old sideways range (not that big by historical standards) ever since. While it’s true that 2.82% is a good candidate for the bottom of that range, we also have 2.80% just below that. It gets to be a relevant technical level due to previous bounces in Feb/Mar. Then there’s the yellow line in the following chart. Maybe we should be looking at the range in those diagonal terms?
At the end of the day, we might or might not break lower. If we do, it will have more to do with the fundamentals, supply/demand technicals, and even the simple fact that summertime absences left more buyers than sellers at the office today. Such a break would merely be a symbolic victory–one that will soon be eclipsed by the return of real momentum heading into the end of the year.