Where are Bonds Headed Next?

Ever heard the saying, "my word is my bond"?  One of the definitions of bond is a "binding security; a firm assurance."

In chemistry another use of the word "bond" is to describe the electrical force that holds atoms together to form a molecule.  It seems not much else in this world is as secure as a bond and over the past year, last decade, and the last three decades it sure seems that most bond securities have indeed held to their definition.

They have been a great place to park your money, assuring positive returns throughout that period.  We have been bullish on bonds seemingly forever and again there may be another high probability buying opportunity.


In December 2011 with the backdrop of the Federal Reserve's Operation Twist announcement and despite supposed experts talking up the end of bonds, the ETF Profit Strategy Newsletter was bullish and stated:

"Perhaps no investment category more than U.S. Treasuries - particularly long-term Treasuries - has confounded Wall Street's leading voices over the past year. PIMCO's Bill Gross (NYSEARCA:BOND) , one of the brightest minds in the fixed income space, was dead wrong about Treasury prices collapsing.  And so were all of the other talking heads who predicted the mid-year deficit ceiling crisis would spell doom. Long-term Treasuries (CHICAGOOPTIONS:^TYX) still have more upside." 

In an article published on 2/23/12 entitled "Look who hates US Treasuries" we again reiterated our position that bonds were the place to be as sentiment continued in the dumps (and giving a contrarian buy signal).

But what about now? 

Long Term Treasury Outlook

At $115 the TLT is well below its $132 all time high price set last July, and on 3/8 it broke down near a 52 week low.  Instead of getting bearish, we see signs of a buying opportunity for traders.

In the chart below we have identified one of the techniques we have used to help capture turning points in treasury bonds (NYSEARCA:GOVT).  When Treasury bonds hit new price highs or price lows on heavy volume it often marks a short-term top or bottom.  In the latest case, it likely means bonds are bottoming as almost all recent instances of new price lows coupled with volume spikes have resulted in a bond market rally.

Aggressive traders can buy the Direxion 20 Year Plus Treasury 3x Bull (NYSEARCA:TMF) or the ProShares Ultra 20 levered ETP (NYSEARCA:UBT) to take advantage of a quick rally in treasury bonds.  We have also identified profit targets and stop loss levels in our ETF Technical Forecast found at ETFguide.com.

We haven't always been bullish bonds though. Levered ETPs, in fact, helped us take advantage of a breakdown in bond prices on December 12 when TBT was at $62 and we wrote to subscribers, "If TLT continues to sell off tomorrow and breaks the support trendline, aggressive traders can buy the TBF (unlevered) or the TBT (levered) to take advantage of the short side.  The stop can be placed at the TLT's equivalent December pivot which is just above 124."  That stop held and TBT hit $66 a month later, up 7% as bonds continued their sell off. 

However, caution must reign supreme for longer term holders as price creeps toward major support that exists at $112. Likewise, the short term trend is still down, until proven otherwise.  If the TLT fails to hold price above that and one other key level, the bond market's downtrend will likely pick up steam. 

No doubt the coming months in bonds are extremely important to its longer term trend.

If a breakdown of these key support levels does eventually occur, aggressive traders may want to again look into the ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) to take advantage of the levered short side, or more conservative investors may want to shorten their bond duration by switching into the iShares Barclays 7-10 Year Treasury (NYSEARCA:IEF) or look into hedging with the ProShares Short 20+ Year Treasury (NYSEARCA:TBF). 

The ETF Profit Strategy Newsletter highlights important support, resistance, and target levels with actionable ETF strategies that help investors and traders stay ahead of potentially major trend changes.  Updates on long term bonds as well as other asset classes are provided twice a week in our Technical Forecast.Follow us on Twitter @ ETFguide