Written by Jim Welsh

Treasury Bond Yields

The March employment report was not nearly as weak as the headline increase of 98,000 new jobs suggested, which is why Treasury bond yields initially plunged and then rebounded on Friday. At the low the 10-year Treasury yield touched 2.271%, before closing at the high of the day at 2.373%. A ten basis point range is large. However, Friday’s reversal does not change the intermediate outlook for Treasury yields to fall further.

As discussed in the April issue of Macro Tides, GDP growth in Q1 was probably below 1.5%, and second quarter GDP is not likely to improve much. If correct, the assumption that the Fed will raise rates again at the June meeting may be called into question at some point, which would help inspire more short covering in the Treasury bond futures. Over the last month, the Commercials have lowered their long positions from +72,235 to +43,529 in the 30-year Treasury bond futures. But those numbers pale when compared to the -124,000 short positions Commercials were holding when Treasury yields were at their lows last July.

Large speculators were long +103,854 contracts last summer when bond prices were topping. Although Large speculators have lowered their short positions from -62,248 in mid March to -23,058, the rally won’t likely end until the Commercials have a net short position and the Large Speculators are net long. The yield on the 10-year Treasury bond still has the potential to drop under 2.2%.

From the low of $116.49, TLT rallied in a 5 wave pattern up to $121.97. This 5 wave rally indicates another rally is very likely after any pullback. (Chart below) TLT corrected the rally from $116.49 to $121.97 in three waves (a-b-c), which reinforces the expectation of more upside. A close above $121.97 could be followed by another 5 wave rally to $126.69, if the next rally is equal to the $5.48 rally from the low at $116.49. From its high of $143.62 last July, TLT declined $27.13. A 38.2% retracement would lead to a rally to $126.85. When 2 measurement techniques target a similar price target, the odds are higher that the targets may act as a magnet.

Stocks

The main point from the last two WTR’s was that the correction that began after the high on March 1 was not over. Last week I said a close above 2370 would open the door for the S&P to rally to a modest new high above 2401. But a marginal new high would likely generate many technical divergences and lead to another pullback.