Bonds Are Biding Time…Til When&#63

01/07/2016 7:00 am EST

Focus: ETFS

Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Taking a technical look at the chart of this long-term treasury bond ETF, Greg Harmon, of Dragonfly Capital, illustrates that price action shows what is known as a symmetrical triangle building and what this pattern might suggest moving forward.

Treasury Bonds all have one feature in common. You have to wait to get your money back. Whether it is a savings bond or a 30-year Treasury, the vast majority or end purchasers wait until the maturity to get paid back. Oh, sure, you can sell them early, but most do not.

So, in most cases, the theatrics that play out day to day in the market have no impact on bond buyers. They lead to changes in the mark to market value of bonds, but hey, you always know it will be worth $1,000 or $10,000 at maturity. Where changes in rates come into play is when bond holdings mature and need to be reinvested.

If you are reallocating away from bonds again it is probably not an issue for you. But if you are rolling over you have probably noticed that US Treasury bonds moved higher in yield as the Fed said they would raise rates soon and then just stalled. Now the Fed has followed through and what has happened with Treasuries? Nothing.

Click to Enlarge

The chart above shows the tightening consolidation that has occurred since August. Does this mean rates will not rise on long-term bonds? Maybe. Does it mean that there is a battle continuing between those that think the initial rate hike gets undone and those that think more are on the way. Maybe?

The price action shows what is known as a symmetrical triangle building. This pattern looks for a move on the breakout of the triangle of about $8. It just does not tell you which way price will break. In fact, all the other factors in this chart also point to a sideways movement. Momentum is stalled. And volatility is tightening as well.

One other possible clue lies in the triangle itself. They generally experience the most dramatic moves when the price breaks at about two/thirds of the way through the triangle. This one is about halfway, so perhaps there is a couple more weeks of consolidation before we see price break. There we are full circle…more waiting.

By Greg Harmon of Dragonfly Capital