Bonds are finally cooling off after a red-hot August.
It's left investors wondering what the implications are, as yields rebound higher and yield-curve inversion worries abate. Is this a buy-the-dip opportunity in bonds or is there more downside ahead?
The fall in bond prices and rise in yields has helped ease concerns about a coming recession. Not only are bonds a safe-haven that investors flock to when volatility is on the rise, but the demand for long-dated bonds drove down their yields, temporarily inverting the short-term yields.
That caused yield-curve inversion worries, which seemed to generate far too much acknowledgement from even the most casual of investors. Investors are experiencing a return to normalcy as the trade starts to unwind.
Buy the Dip in Bonds?
In August, the TLT erupted from $132, surging to $148 where it put in a double-top over the past few weeks. After pulling back, shares are now testing the 50-day moving average and post-breakout consolidation zone between $137.50 and $138.
In April and July, the 50-day moving average was a great buying opportunity for investors. But with the velocity of the current unwind, and with equities suddenly back in favor, there are questions as to whether the 50-day will again buoy bonds.
Investors who are interested in a long position have an attractive risk/reward, though. Should the 50-day and prior consolidation zone hold as support, then the TLT could rally. The first upside target would be the declining 20-day moving average, with $148 the next target above that.
Should it fail and TLT close below $137.50, investors can consider stopping out. With shares down into support, it's a relatively low-risk setup with a high-reward potential should a bounce ensue.
If support fails, a decline down to the breakout level near $132.50 to $132 would be a downside target to watch.
Should the TLT continue lower -- and bond yields continue higher -- it may benefit bank stocks. Note that JPMorgan (JPM - Get Report) , Citigroup (C - Get Report) , Bank of America (BAC - Get Report) , Goldman Sachs (GS - Get Report) and others have all enjoyed a solid rebound since the TLT began its retreat.