MorningWord 12/6/13: Bond SkyFall Coming To A Theater Near You? $TLT

by Dan December 6, 2013 9:28 am • Commentary

This morning’s better than expected November non-farm payrolls number and lower than expected unemployment rate at 7% have for all intents and purposes almost guaranteed a taper in the coming months.  The pundits on CNBC are all in universal agreement that if we get the framework for a budget deal before Congress goes into Holiday recess on Dec 13th, then we could see some sort of change of language hinting to Jan or March Taper at the Dec 17/18th FOMC meeting.

The yield on the 10 year treasury bond has doubled since its July 2012 low, though it pulled back just below the 3.00% level in early September amid taper speculation 3 months ago:

10 Year Treasury Yield, Courtesy of Bloomberg
10 Year Treasury Yield, Courtesy of Bloomberg

The reaction today to the jobs report is telling in that the rates market is essentially unchanged, despite the better than expected data.  The stock market initially views it as goldilocks data, not too cold and not too hot, while precious metals have reversed higher after initial weakness. Meanwhile, the dollar, like rates is unchanged too.

But back to Treasuries.  Longer-dated Treasuries have been hovering near their lows for the past 4 months, but have held on to support each time.  TLT is now back in the green this morning after trading at a new low immediately after the jobs number came out.  The $102 area is the obvious spot to watch:

TLT 1yr from Bloomberg 50 day moving avg in purple
TLT 1yr from Bloomberg 50 day moving avg in purple

Obviously the TLT is sitting on Massive technical support and given this morning’s data, and bond’s reaction it seems like it might be an ill advised press on the short side at the moment, we would likely be inclined to do so on a bounce back towards the 50 day moving avg, but likely somewhere below $105.

On a longer term basis, the 4 year chart below (TLT vs 10 yr Treasury yeild) shows the massive affect of years of QE on the bond market, with this years so called “Taper Tantrum” starting in May where long term bond bulls decided to front run the fed.  If in fact the Fed does start to decrease the amount of bonds they buy, many economists think that we could quickly see a spike in rates up to 4%, where they were in April of 2010 (white circled) with the TLT down at $90 (red circled).

TLT vs 10 yr Treasury Yield 4 yr chart from Bloomberg
TLT vs 10 yr Treasury Yield 4 yr chart from Bloomberg

So while we don’t think an immediate break of support in Treasuries is likely, the longer-term setup looks increasingly risky to us, particularly as good economic data on the normal passage of time brings the Taper closer and closer into view.  We’ll look to post some potential structures later today for the time when we do pull the trigger.