Treasury bond prices are also important to watch, although in a slightly different manner. They are not leading, in the same way Yields are leading. Typically, the chart structure in which Treasury bonds move could be of any importance only if a major breakdown or breakout occurs.
We covered 10-year Yields in our Market Outlook 2017 According To Our Proprietary Indicators. The key take-away of that article was that rising yields (hence falling Treasury prices) would be good for stocks.
So far, Yields have continued to rise, and so did stocks, because both markets are positively correlated. That is a correlation at play on the long term.
On the shorter term we observed that a temporary correlation is at work: rising yields are negatively impacting gold. We stress the fact that this is a temporary correlation, typically one that lasts 12 to 18 months. It is a result of dominant market trends at play, which, also, typically last 12 to 18 months. We explained this in Yields are a leading indicator for gold prices.
With these long term and short term dynamics at play, we now take a look at bond prices, as a secondary leading indicator. Interestingly, the 20-year Treasuries represented by the TLT ETF is testing a major support area. As seen, the current channel is at play since 2007.
What TLT does around 118 points will be telling for stock markets, and, also, gold. The former because of the long term market correlation, the latter because of the shorter term (temporary) market correlation, as explained above.
If the 118 level in TLT does not hold, we expect downside potential until 112. But if that level would not hold, money would flow to stock markts, resulting in explosive prices, and, hence, creating a gigantic bubble. We are not pretending that scenario will play out, we are just observing that a breakdown of TLT would have major implications of stock markets (bullish) and gold (bearish).
Investors are closely watching 118 and 112 points in TLT. We believe that price trends in TLT, being a barometer for risk, carry potential predictive value for stock markets and gold.
The iShares Barclays 20+ Year Treasury Bond ETF (NASDAQ:TLT) was unchanged in premarket trading Monday. Year-to-date, TLT has declined -0.41%, versus a 6.04% rise in the benchmark S&P 500 index during the same period.
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