Bonds Continue to Work Lower

On June 13, in an article on Barchart, I wrote, “The trend in the long bond futures remains lower, and the technical and fundamental factors support the current path of least resistance.” The nearby US 30-Year Treasury bond futures were at the 133-15 level on June 13. 

Bear markets rarely move in straight lines, and the long bond futures recovered, reaching a high of 145-31 in early August. However, the bond market ran out of upside steam and was back near the lows on September 7. The bond bear continues to roar, with the long bond approaching the multi-year low in early September. The iShares 20+ Year Treasury Bond ETF product (TLT) follows the long bond futures higher and lower. 

The Fed is committed to fighting inflation

There was no FOMC meeting in August, so after two consecutive months of aggressive 75 basis point Fed Funds Rate hikes in June and July, the US central bank took a break. However, the vacation did not slow the Fed’s hawkish tone. At the annual Jackson Hole, Wyoming conference, Fed economists and Chairman Jerome Powell were not shy about their plans to continue increasing short-term rates to battle inflation. The central bank is using a combination of rising nearby interest rates and balance sheet reduction via quantitative tightening to push inflation to its 2% target rate. 

The Fed and the US Biden administration may have called inflation a “transitory” event caused by supply chain bottlenecks and other pandemic-inspired reasons throughout most of 2021. However, the pressure of rising consumer and producer prices became far too much for the central bank in late 2021. Historically low interest rates and government stimulus to counter the pandemic’s economic impact planted structural inflationary seeds that were anything but “transitory.” Throughout 2022, inflation has become public enemy number one for the central bank and administration in Washington, DC. 

At the upcoming September meeting, the FOMC will likely push rates fifty or seventy-five basis points higher from the current 2.25% to 2.50% level.

The long bond futures bearish trend continues

The trend in the long bond futures contract remains bearish as the US 30-Year Treasury continues a path of lower highs and lower lows. 

The continuous futures contract chart highlights the decline to a low of 132-04 in mid-June 2022, the lowest level since April 2014. After a recovery rally that took the long bond futures to 145-31 in early August ran out of steam, the nearby long bond futures were back near the low on September 6. The bearish trend in the bond market since the 2020 high remains firmly intact in early September 2022, supported by the Fed’s vigilant efforts to combat inflation. 

GDP data could throw a curve ball at the central bank’s plans

Inflation aside, the US gross domestic product declined in the first and second quarters of 2022. Economic textbooks define a recession as two successive quarterly GDP declines. Monetary policy fighting inflation only exacerbates recessionary pressures, so rate hikes may be mutually exclusive when addressing stagflation, a recession with higher inflation. 

Meanwhile, the Fed and Biden administration is calling GDP data an economic “transition” and run the same risk of miscalculating the impact of a recession they did when underestimating inflation last year. A continuation of GDP declines in Q3 and Q4 could cause the Fed to curb its enthusiasm for interest rate hikes. However, the central bank seems on an unstoppable course to push the Fed Funds Rate to the 4% level and continue to reduce its swollen balance sheet, setting the stage for what could be significant financial turmoil. 

The TLT moves higher and lower with long bond futures

The long-term chart in the US 30-Year Treasury bond futures shows a bullish trend from 1981 through 2020. 

The chart highlights the pattern of higher lows and higher highs for nearly four decades. This year, the long bond futures fell below the first long-term technical support level at the October 2018 136-18 low. The next downside target stands at the December 2013 127-23 bottom. The bonds appear to be heading in that direction, but even the most aggressive bear markets rarely move in a straight line, and corrections are the norm, not the exception. 

The most direct route for a risk position in the long bond market is via the futures that trade on the CME’s CBOT division. Meanwhile, the iShares 20+ Year Treasury ETF product (TLT) provides an alternative for those looking to participate in the long maturity fixed-income products without venturing into the futures arena. TLT is a highly liquid ETF product. At $108.16 per share on September 6, TLT had over $22.925 billion in assets under management. The ETF trades an average of over 14.2 million shares daily and charges a 0.15% management fee. 

As the chart illustrates, the TLT ETF product does an excellent job tracking the US long bond futures as it has made lower highs and lower lows since 2020 and was approaching the mid-June low on September 6. 

Expect higher interest rates and lower bonds over the coming months

The Fed has dug in its heels, declaring that ending inflation is its only goal. One Fed economist, Neel Kashkari, the Minneapolis Fed President, went as far as saying he was “happy” to see the stock market fall after the statements from Jackson Hole. It will take more than two quarterly GDP declines to slow the ascent of short-term US interest rates and aggressive quantitative tightening. 

When it comes to the administration, inflation remains the enemy as the mid-term elections will determine the future of the Biden agenda. If Republicans take over majorities of the House of Representatives or the Senate, it will make the sitting President a lame duck until the 2024 election. Rising prices are a critical issue for the election as people tend to vote with their pocketbooks. 

The bottom line is that the central bank and administration are likely to continue jawboning against inflation, with the Fed pushing rates higher over the coming months. The bearish trend in the bond market is firmly intact in early September 2022 and looks set to continue. 

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