The price of long-term Treasury bonds peaked just before the Fed lowered their short-term interest rate target in mid-September.
TLT – the Treasury Bond ETF – was trading near $101 at the time. It closed Friday below $91.
That’s a 10% drop in the price of what is supposed to be a low-risk asset in about six weeks. As a result, long-term interest rates are sharply higher than where they were in September.
That wasn’t supposed to happen.
After all, the Fed wanted to lower interest rates. But, as we pointed out in a video essay just before the last Fed meeting, sometimes when the Fed cuts short-term interest rates, it pushes long-term rates higher.
And now the Fed is set to do it again.
Are We Setting Up for a Bounce?
The FOMC meets this week to discuss the fate of the interest rate market. Wall Street expects the Fed will cut its target on short-term interest rates by another 25 basis points.
Given what happened last time, bond traders are nervous.
This time, though, it looks to me like Treasury bonds are setting up for a bounce.
To be clear, I still think long-term interest rates will press higher over time – meaning long-term bond prices will press lower. Record budget deficits, and undisciplined fiscal policy demand that to happen.
In the short-term, though, Treasury bonds are overdue for a countertrend move.
Look at this chart of TLT…
You can see the falling wedge pattern that has developed on the chart, and the positive divergence on all of the various momentum indicators.
This setup looks similar to the setup in late April, just before TLT rallied about 8% in two weeks.
Similar action this time would have TLT trading near $99 by the middle of the month.
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Of course, there’s no guarantee this plays out. TLT could easily break down from this wedge instead. But, the bond market seems to like surprising traders.
Six weeks ago the Fed lowered short-term interest rates, and the bond market surprised traders by pushing bond prices lower.
This week, the Fed is set to lower interest rates again. Traders appear to be betting on lower bond prices.
The surprise would be a bond market rally.
Best regards and good trading,
Jeff Clark
Editor, Market Minute