The most important development of the week (and maybe the year) took place in the bond markets. As such, it should come as no surprise that last week’s volatility in stocks was directly related to what was happening to bonds. As we see below in the chart of the 20-year bond ETF, TLT, it started the week right on the neckline (support) of the multi-year head and shoulders topping pattern. As the week progressed, the sell-off in bonds gained steam and eventually closed out firmly below support. Investors under 40 years of age, and possibly even 50 or older (depending upon when they started investing) have never experienced a declining bond market. So, for most a potential bond bear market is uncharted territory.
As you know by now, all patterns are not relevant or meaningful until they have a confirmed close. A confirmed close we have but we need to see the neckline hold as resistance in the coming trading sessions. If so, the 20-year bond has a tough row ahead as the first target is down at T1, and the second is back at 2013’s lows, some 20% below where we started the week.
The table below shows an example of what bond holders across different types of bonds could expect with only a 1% rise in rates and why this potential breakdown is such a big deal. Not every rising rate period is exactly the same so your mileage may vary. What stays constant regardless of the period is the fact the longer the maturity, the greater the expected decline.