(Bloomberg View) -- The U.S. Treasury market yield curve has flattened over the last couple of weeks as bond prices generally rose, aided by what had been a hawkish Federal Reserve amid a series of softer economic data, especially on the inflation front. Somewhere in there I’d toss any number of headlines or tweets coming out of Washington that at the very least raise uncertainty about any number of political events and policies going forward.
As essentially a fundamental sort of analyst, it behooves me to pay attention to all those things. However, there are times to put "strategy" aside and focus on tactics -- and now seems to be one of those. In other words, when raw economic news has gone quiet and the summer doldrums are upon us, it’s time to look anywhere and everywhere for market direction -- not to mention career relevance.
This is where technical analysis comes into play. The measures I’m looking at suggest further momentum toward lower yields.
Let me start with a near-term chart that will make sense to both pure chartists and fundamentalists. On the Bloomberg terminal, it’s called “Market Picture” and is a histogram showing trading volume at a given price or yield. While there are various patterns that can be identified within what, frankly, looks like a series of financial Rorschach tests, what I see are volume bulges that show me levels where activity has taken place and is therefore technically significant. Beyond the mumbo jumbo of technical analysis, think of these bulges as areas where there is either a lot of selling or buying. Simply put, they could be pain thresholds that force people in or out, or areas that recently have generated buying -- or selling -- interest in size.
The chart below is of five-yields from June 8 through July 20. What I’ve done is combine several days to show where volume built up during that time frame. The bulge on the right is from June 8-27 and shows the widest point, i.e. level of most activity, at around 1.76 percent. As the market sold off in late June, there was a thin area of volume area around 1.80 percent that was represented by, well, a narrow band of activity. I show that with the horizontal red line.
Over that line, you’ll see one area of building volume from June 27-30, one from July 2-11 at higher yields, and then another from July 10-18. After doing some work at the end of June, five-year notes sold off again, creating a higher volume area, consolidated, and then rallied after July 11. That volume bulge represents a solid rejection of the higher-yield range consolidation. The wide point -- or mode -- at 1.85 percent is the same as that of late June. This underscores its importance as an area of high activity on two distinct volume developments.
With the move under that level, and at the low yields of those two ranges (June 27-30 and July 11-18), the last couple of days are seeing a new consolidation, which looks to be a precursor to a probe back towards 1.76 percent and perhaps toward the bottom of that earlier consolidation under 1.70 percent. I can certainly come up with more fundamental rationales for that, such as the latest consumer price index data or retail sales figures, but as time moves on from those releases, and in the absence of more critical data, price action alone seems to be the story.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
David Ader is chief macro strategist at Informa Financial Intelligence. He was the No. 1 ranked U.S. government bond strategist by Institutional Investor magazine for 10 years.
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