Favorable Risk to Reward in Treasuries

While many investors are calling for a large drop in long term Treasuries we are currently seeing a good risk reward trade to the long side in the long bond. In the chart below you can see our reversion to the mean chart on the 30-year Treasury yield. When it is stretched to the downside things are bearish and when it is stretched to the upside it is bullish. Right now it is stretched almost 1.5 standard deviations away from its historical mean which usually leads to a move lower in yields and a move higher in bond prices. (Click on chart twice to enlarge)

30-Year Yield Reversion to the Mean Chart


As you can see in the chart below of the 30-Year Treasury yield we are at the top of a long term downtrend in yield. Each time since the 1987 that yields have hit this line they have gone lower. Eventually this will stop and yields will breakout to the upside but if history is any guide and the trend continues than at least for now yields are once again headed lower. (Click on chart twice to enlarge)

30-Year Treasury Yield


Finally lets look at the LT 20+ year Treasury bond ETF. As you can see below it has found support over the last seven months in the highlighted $86-89 range. On the upside we have resistance around $98. The risk to reward is quite favorable right now as we can risk $1-2 with an upside around $9. (Click on chart twice to enlarge)

TLT-20+ Year Treasury Bond ETF


So while this may be the time that Treasuries tank and yields go screaming higher we doubt it and are modestly positioned to the long side. Eventually we will be shorting Treasuries but not until yields break out and end the trend that has been in place for over 20 years.

Happy Trading,


Disclaimer-The Macro Trader is currently long TLT

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