Technical Strategy

U.S. Bonds Starting to Look Pricey After a Big Move

Robert Sluymer
Robert Sluymer
Managing Director and Technical Strategist
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U.S. Bonds Starting to Look Pricey After a Big Move It wasn’t a pretty week for stocks. Bonds, however, were another story. Investors ran to U.S. Treasury 10-year bonds and yields fell, as global rates incrementally turn negative and the economic implications of trade worries deepens. (For more see page 3)

However, 10-year bond yields (bond prices move inversely to yields) have now declined into a technical band defined by a 50-62% retracement of the 2016-2018 rebound after downside moves from 2018 highs. This size retracement is often a level from which rebounds develop, which to me raises the question of whether bond yields are getting overdone on the downside. That is, bonds might be pricey.

What to do?

Given the weekly relative strength index momentum in the bottom panel (see below chart) is as oversold as it was in 2016 and at other important inflection points, I expect a yield bounce to develop near current levels and would caution investors from allocating further exposure to bonds at current levels.

US 10-year bond yields – Weekly

U.S. Bonds Starting to Look Pricey After a Big Move

Here are my noteworthy leaders and laggards for the week.

While defensive leadership in utilities and staples bounced higher in May, they have yet to show any strong technical evidence of actually building a new uptrend. Interestingly enough, bond yields globally have fallen sharply, but the relative performances for utilities and staples has only marginally improved. It actually deteriorated into the end of this week.

U.S. Bonds Starting to Look Pricey After a Big Move

As such, I remain market weight in these defensive sectors in anticipation of moving to underweight in the third quarter.

Meanwhile, the leadership remains in the technology and consumer discretionary stocks. Despite last week’s broad market weakness last week, these two sectors showing very early signs of improving this week, after pulling back earlier in May toward their rising 200 day moving averages.

Within technology, semi-conductors are particularly noteworthy given they have outperformed the S&P 500 for the past three days and are potentially signaling a change in risk appetite, at least short term, within the market.

U.S. Bonds Starting to Look Pricey After a Big Move

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Robert Sluymer
Robert Sluymer
Managing Director and Technical Strategist
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