We might be seeing the top of the Treasury bond market.
Long-term U.S. Treasury bond prices spiked sharply higher on Monday as panicked investors dumped stocks and ran to the perceived safety of Treasury bonds. iShares 20+ Year Treasury ETF (TLT) – the exchange-traded fund that tracks long-term T-bond prices – traded almost as high as $180 per share and then reversed.
This is the sort of action that often marks the end of a short-term rally. But, in the case of Treasury bonds, the action in TLT this week could actually signal the end of the 30-year bull market in bonds.
Look at this chart of TLT…
TLT hit $179.70 per share on Monday. At that price, TLT was up about 30% for 2020.
Think about that for a minute. U.S. Treasury bonds – the assets that people buy when they want a low-risk investment – rallied 30% in just over two months.
This is a classic parabolic move. And, like just about every other parabolic move we’ve ever seen in the financial markets, this one likely marked the high price for the asset. Treasury bonds are headed lower from here.
To get an idea of the sort of action we’re likely to see in the U.S. Treasury bond market, let’s take a look at how another parabolic move played out.
Here’s the chart of Bitcoin from when it made its parabolic move back in 2017…
The first decline from a parabolic move is usually quite steep. Then there’s a rally attempt – where the asset tries to get back up to its parabolic high. That rally usually ends with a lower high. And, the asset then goes on to eventually erase all of the gains from its parabolic move.
In the case of Bitcoin, it took just under one year for it to give back all of the gains made in late 2017. Bitcoin traded back down to $4,000 per coin in late 2018.
Treasury bonds are headed for a similar fate. TLT is up 30% in just two months so far in 2020. But, Monday’s spike higher will likely prove to mark the top. Look for an initial sharp drop from here, followed by an attempt to rally back to the high.
Once that rally attempt fails, Treasury bond prices will be headed back down. The T-bond bubble has popped. TLT will likely give up the gains from the last two months by the end of the year.
Best regards and good trading,
Jeff Clark
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