US Treasury bonds have had a good rally over the past few weeks - on rising risk aversion, deflationary expectations, and momentum buying.
During the rally, it is visible that the 20-day moving average had been a good technical support in both the 10-year and 30-year futures. For example, throughout the choppy trading in June, 30-year T-Bond prices frequently rebounded from this line.
Therefore, the break of this indicator yesterday could be an indication that rally is withering. Coupled with an increasing risk appetite, we envisage a further price decline. A short position is advised.
One way to gain downside exposure to the falling long-term bond prices - apart from shorting the future directly - is to use the UltraShort Barclays 20-year ETF.
Because this instrument is a 'short', it rises when Treasuries fall; and vice versa.
Technically, a long position is attractive because there is good support right at the 2009 lows (see right). Moreover, being oversold, we expect a sharp rebound in the next few weeks.
An upside target is pencilled in at 45, where there is a small bearish gap to be covered. We open a long position here.
Similarly, because of the rising risk appetite, we expect investors to release some Swiss bonds into the market - Swiss bonds accumulated during the May and June crisis.
A 20bps rise in the 10-year bond yield is a distinct possibility. This is just the top of the base. We do not, at least for now, expect the yield to return to the April highs (see right).