Why Bonds Are Set Up for an Explosive Breakout

Treasury traders have had one heck of a time lately…

In the wake of the banking failures we saw in early March, bonds and their yields have moved in a way I haven’t seen since the pandemic collapse in early 2020.

In the span of 10 trading days, U.S. 2-year treasury yields dropped by an astonishing 27%.

Because a bond’s yield moves inversely to its price, this has been welcome news to traders who went long on treasuries.

But as the banking crisis stabilized, bonds went back to a more normal trading pattern.

Since March 13, the iShares 20+ Year Treasury Bond ETF (TLT) has traded in a tight 5% range.

TLT is an exchange-traded fund (ETF) that tracks the investment results of a basket of U.S. Treasury bonds with remaining maturities greater than 20 years.

(If you’d like to learn more about this ETF, just click the link here.)

My technical analysis of TLT suggests that this tight trading range might soon come to an end.

This means we will see an explosive breakout in bonds, which will also mean declining bond yields.

Let’s look at a chart of TLT together so you can see what I mean…

The key feature of this price chart is the pattern I’ve drawn using the blue trendlines.

This kind of chart setup belongs to a family of patterns known as consolidations.

Consolidations occur when there’s a relatively equal balance between buyers and sellers in the market. This is why this kind of pattern trades sideways in a range.

Although they can go on for quite some time, eventually consolidations must break out in one direction or the other.

In fact, the longer a consolidation takes to resolve, the fiercer the ensuing breakout.

Think of it like steam building inside a kettle. Eventually, the water inside the kettle will reach a boil. When that happens, all that trapped steam must be released.

It’s the same with markets.

That’s what makes the current pattern in TLT so exciting. TLT has been stuck in this consolidating pattern since December 2022.

That’s quite a long time for the steam to build.

And because the price action leading into the consolidating pattern was bullish, the odds favour an upside breakout.

If prices can break out of the upper blue trendline, then I’ll be looking for a move higher.

My initial target in TLT coincides with the August 2022 high of $120.

Happy trading,

Imre Gams
Analyst, Market Minute

In today’s mailbag, a Currency Trader member thanks Imre for his video tutorials…

Hi Imre, I really appreciate your videos using TradingView to walk us through examples of how things like Fibonacci retracement can be used to find the resistance and support levels.

It adds tremendous confidence to your recommendations and is also super fun to learn new things. Thank you, and please keep your videos coming!

– Michelle A.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].