From the Desk of Ian Culley @IanCulley
The FOMC stuck to its script this week, kicking the can and keeping rates steady.
Everyone was expecting the news. But the market wasn’t expecting Fed Chairman Jerome Powell (the man, the myth, the legend) to completely dash its hopes of a March cut.
Strangely enough, rates continue to fall on the news – even as markets adjust to the possibility of the initial rate cut now coming in May.
Before you run out to buy US treasury bonds, check out the overlay chart of the US 2- and 30-year yields:
There’s a big difference.
The 2-year yield is churning sideways, reflecting the market’s expectations of the FOMC’s next move – nothing in the foreseeable future.
On the other hand, the 30-year yield is turning lower. Unlike the short end of the curve, the long end gauges the prospect of long-term economic growth.
What do we do with this information?
Buy long-duration bonds! That’s a much better option than sitting around dreaming of an impending recession. It’s simple – and far more productive.
Plus, the 30-year yield tucked tail at a logical level:
Notice the 30-year stopped rising in the same vicinity as its Oct. ‘22 and Aug. ‘23 peaks – an excellent level to trade against.
But we don’t directly trade interest rates. We trade their corresponding bonds.
Luckily, 30-year T-bond futures are reclaiming a critical level of former-support-turned-resistance:
Honestly, I’m not crazy about buying bonds. But I can’t deny the bullish price behavior.
The 14-day RSI has completed a bearish-to-bullish reversal. And last fall’s long bond trade worked!
I like 30-year T-bond futures long above 123’00, targeting 133’00. (The comparable levels for the T-bond ETF $TLT are 100 and 109.)
To be clear, we can’t hold these assets if they fall below risk levels.
I might not like it, but long-duration bonds are triggering buy signals.
Legendary trader Peter Brandt navigates the markets with the mindset of strong opinions, weakly held.
Perhaps it’s time to drop last year’s opinions regarding bonds, take the trade, and manage risk.
What do you think?
Are you ready to buy bonds?
Let me know. I love hearing from you.
-Ian
Countdown to FOMC
The market is pricing in an initial rate cut at the May meeting following Powell’s remarks yesterday.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of February 1, 2024.
Thanks for reading.
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