Technical indicators can be a useful tool for bond managers, particularly when combined with traditional fundamental/valuation methods and good old fashion macro research. In this piece, we address what the technical indicators are telling us about the potential path of the 10-Year Treasury yield.

From a technical perspective, the 10-Year Treasury yield is testing the three-decade long secular bull market resistant trend line of 2.63%.  Barring another false breakout, a break of 2.63% would put yields in a technical gap that could move yields up to a 3.00% very quickly. In this environment, diversification and active management are the keys to success for bond investors.

The chart below illustrates that the long-term trend line of 2.63% (orange line) is close to intersecting the Fibonacci resistant level of around 2.61% (grey line). Fibonacci levels tend to be well respected support/resistant areas where a break-out occurs or serve as the proverbial line-in-sand that does not get crossed. Historically, once the trendline is broken though, a reversal pattern becomes a higher probability event.

Although a trend change in the 10-Year Treasury yield may sound frightening to bond investors, the technical charts provide a well contained, and range-bound, move in the 10-Year yield if the long-term resistant level is broken.  If broken, the 3.00% level is not only supported, but also coincides with where the 5-year average real rate indicator suggests the 10-year rate should be.

As referenced in the chart below, although a sharp rise of the 10-Year Treasury has historically exhibited negative performance for the 10-Year Treasury, a well-diversified portfolio of bonds, as represented by the Barclays Aggregate Index, has performed quite well in those environments.

Additionally, active management through duration tilting and curve positioning are tools to limit, or even benefit from, the effects of rising rates. In addition, prudently adding spread product can potentially offset a rise in rates as spreads tend to be more stable and offer addition interest income carry.  For Sage clients, one of the major benefits of active fixed income management continues to be adjusting portfolio characteristics to maximize returns in any interest rate environment.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product.  Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage.  Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such.  All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions.  Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances.  All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals.  For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Several of the technical/sentiment indicators we monitor are suggesting equities may be getting stretched. One indicator in particular caught our eye. The American Association of Individual Investors Bullish/Bearish Sentiment (below) reached a multi-year high last week signaling extreme bullish sentiment toward equity markets among individual investors. The current reading is a standard deviation above the norm (on a 4-week moving avg. basis), suggesting investors have become too bullish and begging the question, are we in for a correction near-term?

We dug into what this level has meant in the past for investors, at least over the last 13 years. This level has been hit three times previously since 2005. In all cases markets experienced some volatility and small drawdowns ranging from 1%-6% at some point during the following three month. However, in all three cases the S&P 500 Index was higher three months later, by an average of 3.3%. Bottom line, we are likely to get a small/medium correction soon, but given the fundamental picture, it would not be the start of something larger.  And, if the correction is greater than 10%, we would likely consider it a good buying opportunity.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product.  Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage.  Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such.  All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions.  Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances.  All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals.  For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Bond market observations from the Sage portfolio management team.

The recent shift higher in front-end rates domestically was felt abroad, as well. U.S. 2yr Treasuries have risen nearly 30bps since the beginning of November. In that same timespan, German and French 2yr yields have risen by approximately 10bps. The trend towards tighter monetary policy is not isolated to the United States, as Mario Draghi and the ECB will continue removing accommodation through 2018 with an expectation their quantitative easing program will end in September 2018. Sovereign yields responded accordingly by drifting higher.

Something else that caught our attention is how the real yield story is evolving domestically and abroad. Looking at the differential of US and German 5yr real yields vs. the Euro shows how currency moves are tracking real yields. As German real yields have shifted lower over the last year and U.S. real yields have moved higher, the Euro has strengthened. This currency strength could be signaling investors’ anticipation of higher sovereign real yields.

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product.  Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage.  Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such.  All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions.  Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances.  All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals.  For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.