The yield on 10-year U.S. Treasuries stood at 3.23% on November 7, 2018. Over the next 10 months, bonds rallied, and that same rate fell all the way to 1.44%, reaching a nearly 3 year low on August 27. Now, with the 10-year at back above 1.80%, it’s time to ask ourselves: is the bull run in bonds over?

This is how I see the bear case for bonds.

Bond Bear Case

Rates bottomed just below 1.5% in 2012 and held that low during the global recession scare of 2016. We held that low again in August of this year, momentum diverged positively, and the yield has since set a series of higher highs and higher lows. This bounce off 1.40 area will play out exactly like the two previous occurrences, and rates will continue rising toward the high end of this 6-year range. Near-term resistance lies at 2% – the 38.2% retracement of the 2013 to 2016 decline and the breakdown level from earlier this year. A break of the multi-month uptrend line would be the first sign of trouble, but price action above 1.50% would simply aid in building a long-term base to rally from. The bear case won’t really be in trouble unless we see a meaningful break of the 2012 lows.

Bond bulls see things a bit differently.

Bond Bull Case.PNG

Rates started setting 5 year highs in late 2018, but then momentum diverged negatively, and the new highs turned into a false breakout. With the ensuing drop below the 200-day moving average, bonds entered a new bull market. Yields trended sharply lower until August, when momentum diverged positively and set up a mean reversion. On the ensuing bounce, rates failed to get above the 38.2% retracement from the 2013-2016 decline and are still below a downward sloping 200-day moving average. Momentum is still stuck in a bearish range, and now that yields have reverted to the mean, it’s time for the next leg of this bull market to begin. If yields get back above 2% for an extended period of time, the bull thesis will be in trouble.

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