Greetings. I hope you enjoyed the weekend and have come into the new week rejuvenated and relaxed.

As I began analyzing the technicals on several markets on Sunday night, I immediately looked at 10-year notes. As mentioned yesterday, the technicals on many equity products do seem short-term overbought. So, I thought, what can the bonds (meaning 10-year notes) tell us about the current message of the market?

There’s an old saying that went around the exchanges and among market participants that the bond traders are the first to know. Many traders that focus strictly on equities or futures may often overlook the bond market. I find the 10-year note to be a great barometer to keep abreast of; and earlier this year, so did the rest of the market. However, the 10-year note yield climb frenzy has been out of the headlines recently, as the yield on the 10-year has fallen from highs made at the end of March 2021. The high yield printed around 1.77% on March 30, 2021, just above the previous high made on March 18, 2021, of 1.75%. This double topping price action has led to where we are at the time of this writing, ~ 1.60%.

Figure 1 -CBOE 10-year US Treasury Yield Daily Candles January 12, 2021 - May 10, 2021. Source stockcharts.com

Here, we are examining the 10-year note yield during its recent pullback/consolidation. This is the actual yield itself, the futures themselves trade inversely to the direction of the yield. Examining this daily chart, we see the large rise that occurred in 10-year rates during Q1 2021. Since the beginning of April, we see a sideways to lower consolidation pattern, with the yield trading below its 50-day moving average of 1.62%.

During the April Fed meeting, Fed Funds rates were kept near zero as expected. The US economy has certainly picked up steam since the lows of the pandemic. The Fed’s “easy money” theme seems to continue here with the “lower for longer” theme staying in focus. Just a quick bit about interest rates: The Fed sets the Fed Funds rate, which is the overnight lending rate that banks charge each other. The “market” itself trades all of the other interest rate products freely (10-year notes, 30-year bonds, 2-year notes. etc.). The market also trades the short-term Fed Funds rate as well in the futures market.

So, we have the Fed seeming to stick to their guns on the lower overnight lending rates. Is the message of the market the same? Let’s look at the 10-year note futures.

Figure 2 -10-year T-Note Futures CBOT (ERTH) Continuous Front-Month Contract Daily Candles January 12, 2021 - May 10, 2021. Source tradingview.com

Here, we will see an almost mirror inverse of the first yield chart. Remember, bond prices move inversely to yield. Several things capture my attention. The first thing is that we are trading above the 50-day moving average. Secondly, we have moved lower since February as rates rose frantically (at times) and have just consolidated around these levels.

An interpretation of the current market is based on one’s outlook on rates. Will rates indeed continue lower for longer? The 10-year was trading at a sub 1% yield in 2020, seemingly as a result of the pandemic. However, these are extremely low 10-year note rates historically, as we see here:

Figure 3 -CBOE 10-year US Treasury Yield Monthly Candles May 1988 - May 2021. Source tradingview.com

To be clear, I never suggest entering any short-term trade (especially in a futures market!) based on long-term charts. However, it can be beneficial to have an idea of a market’s history over time. Clearly and unsurprisingly, the 10-year note yield has been declining for quite some time. Imagine taking out a 15 or 30 mortgage at 10% - 13% or more? People did it in the 1980s! We are fortunate to be enjoying a low-interest-rate environment.

The thing that sticks out like a sore thumb is the price action on Friday (May 7). This day featured a slew of US economic data including Average Hourly Earnings (came in better than expected), Non-Farm Payrolls (missed expectations heavily), and the Unemployment Rate which came out at 6.1% Actual vs. 5.8% expected.

To top it all off, the US Treasury Secretary spoke during the afternoon.

Interest rate products love to trade heavily on a day like that, and trade heavily they did. We can see below that the market moved heavily at 8:30 AM on the key economic data releases. This data sent 10-year note futures (ZNM2021 / June is the front-month futures contract) soaring higher and moving almost a full handle to the upside on huge volume. However, sellers emerged and sent it right back down. Interesting right?

Figure 4 -10-year T-Note Futures CBOT (ZNM2021) June Contract 30 Minute Candles May 6, 2021 - May 10, 2021. Source tradingview.com

That is some big volatility in the 10-year note market. Notice the heavy volume on that large 30-minute candle @ 8:30 AM.

One last chart for your perusal:

Figure 5 -10-year T-Note Futures CBOT (ZNM2021) June Contract 60 Minute Candles April 13, 2021 - May 10, 2021. Source tradingview.com

Here we can zoom out a little and look at the hourly candles in the June 10-year notes. Given the price action reversal on Friday (May 7), and the highs we saw on April 15, April 21 - 22, and May 4, I like eyeballing these levels for a short entry into the 10-year notes for a short-term trade with a tight stop.

For a trade entry idea into June 10-year notes on the short side, I would be looking for a range of 132'22 - 132'24'5 for a short entry. This range is based on the circled hourly levels above. Opinion for targeting an exit would be 131’27’5. Use a tight stop based on your risk tolerance. This is not a trade you can let sit for long or leave the trade unattended. Futures contracts entail unlimited risk.

If you are not familiar with interest rate futures, do not take the trade. Only trade what you know. Just because they are “bonds” doesn’t mean they can’t get all over you quickly. Equity traders can look at a short entry into an IEF or a TLT for somewhat similar price action, it just won’t be exactly the same. IEF exposes you to 7–10-year treasuries and TLT is the longer end of the curve 20+ year bonds. An equity trader could always track the quotes for the June 10-year notes and use the quotes as a backdrop for a trade entry per the range mentioned above.

To sum up the current viewpoint and opinion:

I have a BUY call for:

• Invesco MSCI Sustainable Future ETF (ERTH) between $67.76 - $68.49. Waiting for a pullback is wise. Always use a stop loss level that caters to your individual risk tolerance.
• First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID) between $86.91 and $88.17. This could be a long-term holding for those that want to have exposure to the US Infrastructure story as it develops. Short-term traders can look at the 52-week high of $90.96 and high $90.00’s to the psychological $100.00 level as take profit level ideas. Always use a stop loss level that caters to your individual risk tolerance.
• S&P 500 (SPX): but ONLY on a pullback to; or below the 50-day moving average (currently 4014) making the suggested range for entry 3990 - 4014. A close below the 50-day moving average on a given day is a suggested stop loss level. Adjust stop level for your individual risk tolerance.

I have a SELL call for:

June 10-year notes (ZNM2021) 132'22 - 132'24'5 with a tight stop. Target 131’27’5.

Thank you.

Rafael Zorabedian
Trading Strategist