“[A] few signs are coalescing to suggest the bond-selling, rate-boosting scare might be tiring. This would allow rates to ease back a bit, which in turn could fuel a nice relief rally in all manner of yield-centric investments that have been ravaged in the bond-market rout, from municipal bonds to real estate investment trusts to junk bonds and perhaps even homebuilder stocks,” Santoli wrote, adding that excessive pessimism has already built up in the Treasury market.
“This isn’t to say Treasury yields will nearly undo their entire surge this year or that they won’t eventually climb above 3% in response to expectations of a less-generous Fed or a pickup in economic growth,” he notes. “But for now, the yield advance has arguably overshot, and the sectors pummeled as a result have suffered from investors planning for a rapid and relentless climb in rates that isn’t likely to happen.”
A pullback in 10-year Treasury yields here also makes sense from a technical perspective. Chris Kimble at Kimble Charting Solutions points out that the rally has lifted the 10-year yield to the top of its long-term channel resistance, while momentum is the most overbought in seven years.
Meanwhile, only 23% of investors are bullish on bonds right now, the lowest level since early 2011, Kimble added, citing data from SentimenTrader.com.
If Treasury yields do correct, “then opportunistic investors might look to exploit it through roughed-up fixed income ETFs, such as iShares Barclays 20+ Year Treasury Bond (NYSEArca: TLT), iShares S&P National AMT-Free Muni Bond (NYSEArca: MUB), SPDR Barclays High Yield Bond (NYSEArca: JNK) or the Vanguard REIT Index (NYSEArca: VNQ),” according to Santoli. “With the 30-year mega-bull market in bonds likely having peaked, these are not buy-them-and-forget-them investments. But they could very well work for a trade, assuming the rate-rise panic subsides for a while.”
Chart source: Kimble Charting Solutions, click image for larger version.
Full disclosure: Tom Lydon’s clients own TLT.