Will Taper Talk Break The Long-Term Trend Line in Bonds?

There has been a lot of ink spilled over the topic of whether or not the Fed will taper in September. It seems the consensus is for a $20 billion decrease in QE. I’m not completely sold that we will see a tapering in September. If we do I think it’ll be closer to $10 billion as we have already seen a spike in rates, both Treasury and mortgage, and the Fed will likely want to dip its toe in the water before completely jumping into the taper pool. Meanwhile, the bond market is preparing itself for a taper as the 10-year Treasury yield continues to rise.

In June I wrote that the 10-year yield (TNX) was approaching its 200-week moving average. This MA acted as resistance in 2010 and 2011. Amid the massive outflows from bonds I was looking for a bounce in bond prices (and thus a drop in yield). But it didn’t happen. We saw the 10-year Treasury yield slightly consolidate around the 200MA but taper talk lit the match that took bonds lower and the 10-year yield higher.

With the continued march in yield we are now at a long-term trend line from the 2006 high. This trend line (along with the 200-week moving average) also seemed to stop the rise in yield in ’10 and ’11.

Turning to sentiment data, specifically the latest data from Consensus, the percentage of those bullish on bonds is at 21%, just shy of the low set in 2011 as bonds bottomed out, which was the lowest bullish percentage going back to 2005.

Next week we’ll get the unemployment data and that could be a deciding factor in whether the Fed pulls back a portion of the QE program or if Bernanke keeps his cash helicopter hovering over the financial markets. Going forward I’ll be watching the above trend line and see if the bond market gets any reprieve or if Fed rumors keep the Treasury yield elevated.

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