Sell Treasuries in May and Go Away Is What the Charts Suggest

(Bloomberg) -- Last month's rally in U.S. bonds notwithstanding, bears remain in control of the market, chart patterns show.

Renewed pessimism is seen across the spectrum of assets ranging from 10- to 30-year notes, which points to a steeper yield curve, specially as the market positioning clears out after the biggest short unwind on record.

March Retracement

Yields on 10-year bonds may continue to rise toward 2.43 percent -- the 100-day moving-average that serves as resistance -- where a new round of consolidation may ensue. Momentum studies endorse the uptick in yields, with the nine-day RSI climbing above the neutral 50-mark this week. Last week's unfilled gap serves a reminder that bears carry strong resolve, even as the move higher in yield remains so far a retracement of the decline since from mid-March.

• Yield resistance at 2.39 percent (interim), 2.42 percent-2.43 percent and then 2.45 percent
• Support at 2.28 percent and 2.26 percent-2.25 percent

Negative Momentum

The daily chart on the futures contract that tracks 30-year bonds is signaling downside risks in the short term, with the current wave of negative momentum seen extending toward support at 150-04, which is the 100-day moving average. Momentum tools are trending lower and are far from oversold extremes, a technical configuration that bodes well for short-duration participants.

Following Treasury Secretary Steven Mnuchin's comments this week on a possible sale of ultra-long bonds, yields on longer-term Treasuries jumped, with those on 30-year notes rising by the most since Jan. 18, to reach 3.02 percent.

• Generic contract support at 150-26 (55-day moving-average), 150-04 and 149-16 
• Generic contract resistance at 153-06 and 153-22

Mean Reversion

The difference between two- and 10-year yields has failed to sustain the flattening momentum below 100 basis points, and this week's renewed rejection boosts the chances of a mean-reversion toward the 55-day moving average at 113 basis points. A closing break above 107 basis points could complete a double-bottom and serve to amplify the steepening risk. (See story here on the widening gap between five- and 30-year notes.)

• NOTE: Sejul Gokal is a technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

To contact the reporter on this story: Sejul Gokal in London at sgokal1@bloomberg.net.

To contact the editor responsible for this story: Ven Ram at vram1@bloomberg.net.