TLT EFT rebound faces major test from long bond auctions, Fedspeak

• Long bond yields worldwide plummeted last week
• TLT, an ETF that tracks a basket of long-dated US Treasuries, hit the highest level in six weeks
• Two large longer-dated US Treasury auctions and busy Fed speaking calendar will

Bonds make the financial world go round, especially US Treasuries. And when it comes to valuing other financial and real word assets, few things are more important than long bonds, those maturing in ten years or greater.

After a week where we’ve seen one of the largest declines in bond yields in years, and with a slate of long-dated Treasury auctions arriving on Wednesday and Thursday, it’s not a bad time to look at iShares’ 20 Plus Year Treasury Bond ETF, especially with trading volumes for ‘TLT’ are going through the roof.

TLT EFT rebounds from multi-decade support

After testing long-dated support going back more than a decade during October, the ETF bounced strong late last week, driven by a variety of positive factors for bond investors. You could hear the collective sigh of relief from fixed income desks as the quarterly US Treasury refunding plan, the Bank of Japan and Federal Reserve rate decisions and US nonfarm payrolls report came and went without incident, providing a rare moment that buyers pounced on, sending TLT back levels seen in mid-September.

However, the rebound faltered around $89, the intersection of horizontal and downtrend resistance and 50-day moving average. To become more excited about upside it will likely have to clear this zone, otherwise it risks reversing back towards the recent lows.

A break of $89 may solidify the view that bond yields have peaked, something that may assist more traders to adopt a bullish stance. Levels to watch are located around $92.30, $97.50, $103.80 and at $109. On the downside, $82.70 to $81 is essentially a support zone established over a decade ago. Below that is essentially unchartered territory for this ETF.

Fundamental risks return for TLT

From a fundamental perspective, you can expect Fed speakers to push back against the easing in financial conditions seen following the Fed decision by talking up the potential for further rate hikes. This far into the tightening cycle, the FOMC cannot allow activity to reaccelerate through lower bond yields, lower credit spreads, asset price gains and lower volatility. Neel Kashkari, the Minneapolis Fed President, has already used the media to send out a renewed hawkish message. Other FOMC members will likely follow suit this week.

With little major US economic data on the radar, auctions for 10 and 30-year US Treasuries on Wednesday and Thursday respectively loom as potential catalysts for long bond yields to continue reversing or revisit the prior cycle highs.

-- Written by David Scutt

Follow David on Twitter @scutty