Time to follow up on a technical set up I had posted publicly on bonds at the end of December 2019 in It’s not Over. The question was in regards to the reflation narrative. While equity markets kept making new highs (and continue to this day) on the heels of loose central bank policies, the primary justification of multiple expansion was based on growth to come, i.e. reflation.

I had questioned the reflation narrative as reflected in the charts of bonds, in $TLT and the 10 year yield $TNX.

Specifically I had pointed to technical patterns that suggested that yields would drop further and bonds would break out.

For reference these were the original charts posted:

The 10 year was trading at 1.926% and $TLT at $135.82.

For $TNX I suggested: “What the pattern suggests is that a breakdown could not only invite a retest of the lows, but even new lows are possible.”

For $TLT I said: ‘If anything this chart suggests that if the pattern confirms and breaks out higher we may see a run back to the top of the upper trend line. And you know what that means right? That the Fed is not only not done cutting rates it may be heading back to zero and then this Q4 rally, which may extend into early 2020, was just a liquidity mirage that failed to bring about reflation.”

I’ve been tracking these charts on my public twitter feed and indeed we did see these patterns trigger and the $TNX dropped from 1.92% to 1.51% and $TLT rallied from $135.82 to over $146. Massive moves.

Here are the current charts:

While the coronavirus is currently blamed for a drop in yields, the plain obvious fact is that these patterns triggered way before coronavirus was even known or in the headlines.

Currently one can observe a bit of a bounce in yields and a retrace in $TLT which makes sense as both hit support/resistance versus the 2019 levels.

For us we can show that the technical patterns have indeed played. While the equity market remains technically disconnected and distorted we can note technicals playing out nicely in the bond market. As to evidence of reflation the bond market continues to raise serious doubts. For now it still doesn’t matter to equity markets.

For the reflation evidence to emerge though we need to see a sizable rally in yields above the November 2019 highs or risk is that yields will build a new bearish pattern, which then suggests even lower yields to come. We’ll be watching.

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