The US Treasury has announced today that it is re-launching its sale of the 20-year bond to finance current and future US budget deficits. The last time the 20-year bond was sold to the investment public was nearly 34 years ago in 1986. It is drawing better than expected response for the new issuance. Today, the 10-year US Treasury yield fell 3.22 bp to 0.679%, while the 30-year US Treasury yield slipped 3.3 bp to 1.40%. In a world of ultra-low global interest rates the 20-year US Treasury yield (1.15%) will offer investors something in the middle – a slightly higher yield than the benchmark 10-year US Treasury yield (TNX – 0.70%) but slightly lower yield than the 30-year US Treasury yield (1.43%).
Since the 20-year US Treasury bond is backed by the credit strength of the US Treasury, and where it resides along the US Treasury yield curve many investors desperate in need of income may turn to this fixed income product. Strong interests may come from institutional investors including pension funds, insurance companies, and sovereign wealth funds as many of these professional investors need to match long-dated liabilities with equally long-dated assets. The 20-year US Treasury bond can also help to improve the liquidity for older longer-term dominated Treasuries – a continued issue since the mid-March 2020 financial market dislocation.
On the retail side, the sharp decline in US interest rates over the past year have created an environment where it has become increasingly difficult for US investors to earn respectable returns in the US fixed income market. While there may be downside risks if US interest rates rise sharply, the 20-year US Treasury bonds may become a compelling story, if, however, the US and global rates continue with its structural downtrend toward near-zero or possibly negative interest rates.
So, what are the technical conditions of the 20-year US Treasury yield?
Long-term Trend (Monthly Chart):
On a longer-term basis, the monthly chart shows a major technical breakdown during Mar 2020. 20-year US Treasury yield has broken below its structural downtrend channel (1.37%) during Mar 2020. This breakdown led to a sharp decline to 0.87% (3/9/20). A deeply oversold condition ignited a technical rally over the past two months. However, this oversold rally has stalled near 1.16-1.20% as a potential inside month is developing during May 2020. The high for the month is 1.17% and the low for the month is 1.03% placing it within the high and low of the prior month (Apr 2020 high is 1.19% and the low is 0.98%). An inside month hints of a deadlocked market environment where the bulls and bears are even.
Pending the outcome of the inside month pattern key resistance remains at 1.37% (Mar 2020 downtrend channel breakdown), and above this to 1.67-1.76% (10-mo ma and the Jul 2016 and Aug 2019 lows), 1.82% (38.2% retracement from 2018-2020 decline) and then to 2.21-2.45% (50-61.8% retracement and 30-mo ma). On the downside, a decline below 0.98% (4/21/20 and 4/24/20 lows) suggests a retest of 0.87% (3/9/20 low). Violation of 0.87% can lead to a decline to 0.50% and then to 0%.
Intermediate-term Trend (Weekly Chart):
From an intermediate-term perspective, the weekly chart supports the basis for low US interest rates as the recent Mar 2020 downtrend channel breakdown below 1.35% suggests -1.82% or a downside target to negative rates (-0.53%). The ability to clear above 1.11% or the 10-wk ma can lead to a technical rally to 1.35-1.39% (bottom of its downtrend channel and the 38.2% retracement from Oct/Dec 2019 to Mar 2020 decline). Secondary resistance is also visible at 1.46-1.72% (50-61.8% retracement and the 30-wk ma). A potential higher-low pattern may be developing over the past couple of months. Initial support rises to the higher-low of 0.98% (4/20/20 low), and below this to a retest of 0.87% (3/9/20 all-time low).
Short-term Trend (Daily Chart):
The decline from 2.25% to 0.87% and the subsequent two-month rally has created an upside-down Flag/pennant pattern. This is the opposite of the popular bullish Flag/Pennant pattern. A convincing move above 1.19% would negate the continuation pattern and signal the start of a sustainable short-term rally to 1.60% (3/18/20 high), and above this to 1.76-1.80% (Mar 2020 breakdown and the 200-day ma). A higher-low pattern (0.87%, 0.98%, and 1.03%) as well as the bottom of the Flag/pennant pattern offer key initial support.