The "100% win rate this year" trading indicator shows: Sell long-term US Treasury bonds now

Zhitong Finance learned that the perfect technical trading strategy record since the beginning of this year implies that it is time to sell long-term US Treasuries after the sharp rise in US Treasuries last week. BlackRock's $51 billion Exchange-Traded Fund (ETF) tracking US Treasuries with maturities of 20 years or more surged last Friday, breaking through the "trading envelope" as referred to by technical strategists, indicating that the fund is in an overbought state. This move triggered a sell signal in the strategy based on this indicator, which requires traders to sell when the security reaches an overbought state and buy when it is considered oversold.

The "moving average envelope" strategy has already issued 3 signals in January, February, and April this year, all of which have been profitable. It has a return rate of about 18% in 2024, making it the best-performing among the 20+ strategies tracked by Bloomberg that use technical indicators. The purpose of this strategy is to bet against a security when its momentum becomes extreme. This strategy has performed well this year as US Treasuries have been volatile on a broad scale due to expectations regarding the Federal Reserve's monetary policy.

However, last year, the fund performed poorly, losing around 6.5% in the five-pen trading, slightly lagging behind a simple buy-and-hold strategy. The US Treasury market performed poorly for most of 2023 until the last two months of last year when it rebounded as more people bet that the Fed would soon shift to an accommodative policy.

The indicator issued the latest signal last Friday, calling on investors to sell at the opening on Monday after the largest weekly gain in US Treasuries since December last year. The yields on the 10-year and 30-year US Treasuries fell to their lowest levels in over two months last Friday, following lower-than-expected inflation data released last week, boosting market confidence that the Fed may start cutting rates as early as September.

On Monday, the 30-year US Treasury yield rose by 8 basis points to 4.43% at one point, while one of the most actively traded bond ETFs, the TLT fund, fell by over 1% as traders prepared for a wave of corporate bond issuances this week. The last time this strategy issued a trading signal was on April 16th when the 30-year US Treasury yield rose to 4.8%, hitting the highest level since 2024.

US Treasury yields recovered some of last week's losses due to a large number of new corporate bond issuances, with expectations of two auctions in a shortened holiday week. Longer-term bond yields led the gains, rising by 6-8 basis points. The benchmark 10-year US Treasury yield climbed by 7 basis points. Last week, driven by moderate consumer price data released on Wednesday, the index fell by over 21 basis points to its lowest level since March In the absence of major economic data releases, companies in need of issuing bonds seized this opportunity - with 13 companies in line, including Home Depot (HD.US), which will issue nine tranches of bonds including 10-year, 30-year, and 40-year maturities. Last week was the slowest week for new corporate bond sales this year, mainly affected by inflation data and the Federal Reserve interest rate statement on Wednesday.

Although new corporate bond supply could stimulate investors to sell liquid assets to finance their purchases, government bonds also face pressure from Wall Street firms, which suggested establishing short positions after a sharp drop in yields last week. Banks such as Barclays and JP Morgan have recently positioned themselves for better US Treasury yields.

There will also be two accelerated US Treasury auctions this week, as the US market will be closed on Wednesday, June 16th for the holiday. The monthly auction of 20-year US Treasury bonds, usually held on Wednesday, will take place on Tuesday. The auction of 5-year Treasury Inflation-Protected Securities is conventionally held on Thursday