Hang On To Your Shorts

One of the biggest takeaways from the recent Fed meeting is that I remain bearish on long-term bonds.

Actually, I may be more bearish than I was before.

The reason is simple. The Fed can talk tough. The Fed can talk dovish. The Fed can even hike rates. But the bond market ultimately decides where long term yields go.

That's why I continue to focus on price.

Take a look at the chart of TLT below. Since the 2020 peak, long-duration Treasuries have been trapped in a massive downtrend. More recently, bonds have spent nearly three years building what appears to be a large bearish consolidation pattern. 

The chart isn't showing strength.

It's showing compression within a larger downtrend.

And eventually these patterns resolve.

If TLT breaks below the lower end of this range, it could trigger another major leg lower in bond prices and another move higher in long term interest rates.

The Fed controls overnight rates. The market controls the long end of the curve.

Meanwhile, fiscal deficits remain massive, Treasury issuance continues to grow, and inflation remains sticky enough that policymakers have limited flexibility.

Those are not conditions that typically create powerful bond bear markets.

Could bonds rally? It's always possible but a big trend reversal is unlikely.

Every trade is hard and this one has been frustrating. 

But until price proves otherwise, I continue to believe the path of least resistance is lower for bonds and higher for long term yields.

For now, I'm sticking with the trend.

Hang on to your shorts.

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