A technical trading strategy with a perfect trading record this year is signaling that it’s time to sell long-maturity Treasuries after a rally last week.
BlackRock Inc.’s $51 billion bond exchange-traded fund tracking Treasuries due in more than 20 years (TLT) surged on Friday through what technical strategists call the “trading envelope,” a breakout that suggests the fund was overbought. The move triggered a sell signal in a strategy based on the indicator, which calls for traders to unload the security when it reaches overbought conditions and to buy when it is deemed to be oversold.
The “moving-average envelopes” strategy has generated three previous signals this year — in January, February and April — and all turned a profit. It has returned roughly 18% in 2024, the best among more than 20 strategies using technical indicators tracked by Bloomberg.
The tactic — which aims to bet against a security’s momentum when it becomes extreme — has worked well this year as Treasuries oscillated in wide ranges along with expectations for Federal Reserve monetary policy.
Last year, it fared poorly, losing about 6.5% across five trades, modestly trailing the performance of a simple buy-and-hold strategy. The Treasury market overall struggled for most of 2023, until the final two months of the year when it rallied as bets mounted that the Fed would soon pivot to easing.
The indicator’s latest signal flashed Friday, when it called for investors to sell at the open Monday, after Treasuries posted their biggest weekly advance since December. Benchmark 10- and 30-year yields fell to the lowest level in more than two months Friday after slower-than-expected inflation data last week boosted confidence that the Fed may start cutting rates as soon as September.
On Monday, 30-year yields rose as much as 8 basis points to 4.43% and the TLT fund — one of the most actively traded bond ETFs — slumped more than 1%, as traders braced for a wave of corporate issuance this week.
The last time the strategy sent a trading signal was a buy on April 16, when 30-year yields rose to 4.8%, at the time their highest for 2024.
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