Treasury Breakdown Has Room to Run

 | Mar 12, 2017 | 2:00 PM EDT
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TLT

(This commentary originally appeared on Real Money Pro on Friday. Click here to learn about this dynamic market information service for active traders.)

It's hard to argue against the economic recovery, both at home and abroad.

The U.S. Federal Open Market Committee will meet next week, and is widely expected to raise rates. If it does, it'll be the first time the Fed has raised interest rates twice within a three-month period since May and June of 2006.

Yesterday, we heard from Mario Draghi, head of the European Central Bank. According to Draghi, the ECB wanted to signal "that there was no longer that sense of urgency in taking further actions." In other words, interest rates have probably bottomed in Europe.

Of course, bond prices and interest rates have an inverse relationship; when interest rates move higher, bond prices fall. If the charts are correct, interest rates could go a good deal higher over time, and bond prices could fall considerably lower.

For example, take a look at this chart of the 10-Year U.S. Treasury Note. After a multi-year rally, the benchmark T-note is well off of its highs. Despite this, there is still downside ahead. Over the past five years, the T-Note has formed a massive double top pattern (semicircles).

The next support level for the 10-year is located near 118 (blue line). That's a pretty steep drop, but if we apply a measuring technique to the double top formation, the damage could be even more severe. When applying the measuring technique, the target for the T-Note is 111 (red line), a price which hasn't been seen since 2008. A close beneath 122'20 (black line) would be the first step to set this process into motion.

The breakdown in Treasuries can also be seen via the iShares 20+ Year Treasury Bond ETF  (TLT) , which has formed a large head and shoulders pattern on its weekly chart. This massive pattern projects TLT to about $100, although there is major support near $102 (blue line).

There is no guarantee that rates will continue to rise, but if they do, there are many potential consequences. For example, housing sales could see a temporary boom, as buyers realize that an era of ultra-low interest rates is coming to an end.

This morning's strong employment figures will do nothing to dissuade the FOMC. In fact, according to the Fed Funds Futures, the odds of a 25 basis point June rate hike have now jumped above 50%. The process of rising interest rates and falling Treasury prices may just be getting started.

Source for charts: TradeStation

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