Bullish Conviction on Treasury Prices Is Waning
The lower panel of Chart 1 below plots the daily total net assets invested in the SPDR Bloomberg Barclays Long Term Treasury ETF (TLO) since May along with their 21-day moving average, the latter which we use to identify a trend of monthly expansion or contraction. A corresponding daily chart of TLO, which basically tracks 30-year Treasury Bond prices, appears in the upper panel.
With the exception of a brief period between July 3rd and 14th (red highlights, lower middle of the chart), these assets have been in a trend of monthly expansion (actually since mid-March) which is characteristic of a sustainable near-term advance.
Chart 1
The rightmost red highlights, however, show that these assets have declined below their 21-day moving average as of earlier this week, warning that this uptrend in TLO may be stalling — if not coming to an end.
The lower panel of Chart 2 below plots the daily total net assets invested in the ProShares Short 20+ Year Treasury ETF (TBF) since June, along with their 21-day moving average. TBF moves inversely to the iShares 20+ Year Treasury Bond ETF (TLT) which, like TLO, is a proxy for long-dated Treasury prices.
Chart 2
The green highlights show that the assets invested in TBF have been in a trend of monthly contraction during the entirety of the chart (actually, since late March), indicating a bet on rising long-dated Treasury prices and declining long-term interest rates, up until this week. The red highlights show these assets are now rising above their 21-day moving average to indicate an emerging trend of monthly expansion.
Since TBF is an inverse fund, this recent contraction indicates a bet on declining long-dated Treasury prices and rising long-term interest rates, which corroborates the message of Chart 1 above.
Smart Money Betting on Rising Long-Term Rates
The blue line in the upper panel of Chart 3 below plots the weekly net positioning of commercial hedgers in CBOT 30-year T-Bonds since 2010, with a corresponding weekly chart of the T-Bond contract in the lower panel. Commercial hedgers, who we view as the smart money, use the futures market to hedge their physical holdings in US Treasuries and, as a result, typically accumulate a net position against the trend.
Chart 3
The red circle on the upper right edge of the chart shows that the hedgers are hovering at a historic net short (fully hedged) extreme of 46,000 contracts, indicating an aggressive bet by the smart money that long-dated Treasury prices are overvalued. The red vertical highlights between both panels show that previous similar net short extremes have closely coincided with every significant peak in the T-Bond during this period.
Know Your Levels
Chart 4 below plots TLT daily since October. The red highlights show that the ETF has twice tested and failed at formidable overhead resistance at 127.12 to 128.91, which appears to be the general area that the smart money hedgers have been leaning on with their large net short position per Chart 3 above.
Chart 4
Moreover, now that day-to-day bullish conviction appears to be leaving long-dated Treasury prices per Charts 1 and 2 above, a test of minor support at TLT’s 50-day moving average, currently at 125.61, appears to be on the near-term horizon. Moreover, a sustained decline below the 50-day moving average, a minor trend proxy, would clear the way for a potential test of major support at the 200-day moving average, currently situated at 122.40.
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