Breakout coming soon. Direction?

For the past month, bonds have been trading in a relatively narrow range: between 3.13 and 3.42%, with the average being 3.26%. In technical trading, this is known as a convergence: In short, when any investment trades in a narrower and narrower range, it will shortly break out significantly to either one side or the other — kind of like a trigger mechanism that gets more and more fragile as you approach it.

All this to say, it’s an appropriate time to begin to keep an eye on the market, as you will want to be nimble if this thing breaks in the wrong direction. It’ll happen fast.

Resistance lies at 3.19% (almost exactly where we are trading as of this writing.) And support is at 3.31%. What these numbers mean is that there are a significant number of trades positioned, waiting at those two levels, and that anything that tries to “break through” those levels will see some — well, resistance. However, if burning through either of those two levels, things tend to run in that direction. But overarchingly is the reality that this will not stay in this range much longer.

Which direction remains to be seen. (And if it were possible to make that prediction, the market would have already adjusted for it, and we’d be there.) In short, no one knows. Many opinions on both sides (particularly around 3.19 and 3.31%.)

On the fundamental considerations (which is to say, based on the actual economics, and not the day-trading charts), the unemployment numbers came in much higher than expected: 472,000 in the week ended June 12 — a one month high. Soft economic data is always favorable to bonds, as money generally flows to the safety of bonds. Additionally, inflation numbers are low: An 0.2 percent decline in May (including food and fuel — a 0.1 percent increase for the core, without fuel and food, numbers) gives investors more reason to believe that the Fed will not increase fed-funds rates any time soon. (The Futures expectation of the Fed raising rates before December has gone down from 38% expectation last month, to 24% this month. –Only one person in four believes that the Fed will raise rates before year end.)

All this is also favorable to bond rates, which are inflation-hating, as it cuts into the expected payout of this relatively low interest (and low risk) investment. So, for the time being, the news is bond-favorable for low interest rates.

But where from here? This is unknown at this time; but is likely to make a move shortly. Feel free to register for our free SMS Alerts, on alert to lock/float, and we’ll keep you posted if there is a major move.

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