Tactical Buying Opportunity In TLT?

Conclusion, Investment Implications, Strategy

The recent sharp downward reversal from the 3.05% to 3.35% area in the yield of the benchmark US 10-Year Treasury Note  suggests a potential Tactical buying opportunity in long dated Treasuries as yields decline into the important 2.50% to 2.30% area.  A long position at 119.28 in the the iShares 20+ Year Treasury Bond ETF (TLT) with a protective stop placed below the 114.36 area would target 135.00,  providing a 1:3.2 risk/reward ratio (risking $1.00 to make $3.20) with an initial risk of 4.1%.

Introduction

In our May 5th Special Report entitled “US 10-Year Yields Vulnerable To A Significant Countertrend Decline”, we said:

“The yield of the benchmark US 10-Year Treasury Note is now testing the 3.05% to 3.35% area, a formidable historical area for these yields that is unlikely to be appreciable broken, if at all, without at least a significant corrective move back below 3.00% first.“

Chart 1 below plots the yield of the 10-Year Treasury Note weekly since 2012 with its 52-week (1 year) moving average.  The red highlights show that these yields peaked on May 6th at 3.12%, right in the middle of the 3.04% to 3.24% target that we first mentioned in our April 5thSpecial Report when these yields were at 2.54%.

Chart 1

Although yields may indeed continue moving higher over the intermediate to long term, we view this sharp reversal from the 3.04% to 3.24% area as a potential near-term Tactical opportunity to buy long-dated US Treasuries as yields continue to decline.

Chart 2 plots the CBOE Treasury Yield 10 Year Index (TNX), which tracks the yield of the US 10-Year Treasury Note, daily since 2022. The red highlights show that TNX peaked on May 9th right in the middle of 30.50 to 33.50, which is the index equivalent to 3.05% to 3.35% as shown in Chart 1 above. 

Chart 2

The blue highlights trace out a chart pattern, a head and shoulders, that targets at least a decline to 25.00, which is the equivalent of a 2.50% 10-Year yield.

How To Trade It

The upper panel of Chart 3 below plots the iShares 20+ Year Treasury Bond ETF (TLT) daily since January with its 21-day (monthly, red line) and 63-day (quarterly, green one) moving averages.  The lower panel plots TLT’s corresponding On Balance Volume (OBV) along with its 21-day MA.

Chart 3

The blue highlights in the upper panel point out that TLT starting to edge above its 21-day MA, which suggests an emerging bullish monthly trend change.  Meanwhile, the lower panel shows that OBVis coincidentally rising above its 21-day MA, indicating an emerging monthly trend of rising volume which measures urgency to buy.

Risk/Reward

Table 1 below shows that considering a 119.28 upside target in TLT with a protective stop placed below the 114.36 area, a long entry price of 119.28 would provide a 1:3.2 risk/reward ratio (risking $1.00 to make $3.20) with an initial risk of 4.1%.

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Please consult the table showing our Asbury 6 key market metrics to help determine if this investment is suitable for you.