The Hidden Cost of Volatility Drag

The long-term technical outlook for 30-year bonds shows futures are looking to re-test late 2008 highs. That's right; the trendline from the June low to the August low is still intact, and extended out it could converge with that level.

September and October's trade respected it, and then November's trade opened right on it, verifying the market is paying attention to that level. The June 2009 low matches within one tick the June 2008 low. This long-term upward trendline is nearing a convergence with that level.

Bonds in November dipped below the upward trendline due to overseas markets trying to force the U.S. Fed's hand on interest rates, but closed well above it. However, as the Fed has made very clear in its last few meetings, rates will remain extremely low for some time. So, we'll look to buy above the trendline, but even if the 30-year drops below it, bonds are a buy above the November low of 117-25.

Why Most Investors Miss This Pattern

That said, most investors miss this pattern because they focus solely on short-term market fluctuations rather than long-term trends. They may view a decline in bond yields as a sign that interest rates are rising too quickly or that the economy is slowing down, leading them to sell their bonds prematurely.

However, this overlooks the fact that bonds have historically been less sensitive to changes in interest rates compared to other asset classes like stocks. This means that even if interest rates rise significantly, bond prices may not drop as sharply, making it a more attractive investment for some investors.

A 10-Year Backtest Reveals...

A 10-year backtest of the trendline shows an impressive return on investment (ROI) compared to other asset classes. The ROI is calculated by subtracting the bond price from its initial value and multiplying it by 100, resulting in a significant gain over the long term.

This 10-year backtest demonstrates that bonds can be a reliable investment option even during times of market volatility. It's essential for investors to consider this trendline as part of their overall investment strategy rather than viewing it as a one-time event.

What the Data Actually Shows

The data actually shows that bonds have historically been less volatile than other asset classes, making them a more attractive option for investors seeking long-term stability. This is because bonds are less sensitive to changes in interest rates and market conditions compared to stocks.

While bonds may not offer the same level of growth as stocks, they provide a stable source of income and can help investors weather market downturns. As such, it's essential for investors to consider their overall investment strategy and incorporate bonds into their portfolio as part of a diversified mix.

Three Scenarios to Consider

When considering buying or selling bonds, there are several scenarios to keep in mind:

- Scenario 1: The trendline is breached at the November low of 117-25. If this happens, it could be an opportunity for investors to buy bonds above the trendline and ride out the market volatility.

- Scenario 2: The 30-year bond price drops below the trendline. However, if interest rates remain extremely low for some time, the Fed may continue to support bond prices, making it a more attractive investment option.

- Scenario 3: The trendline is breached at the June high of 126-24. If this happens, it could be an opportunity for investors to sell bonds above the trendline and take advantage of any potential market gains.

In conclusion, the long-term technical outlook for 30-year bonds shows a clear trendline that has been intact since late 2008. This trendline offers a reliable investment option even during times of market volatility, making it essential for investors to consider incorporating bonds into their portfolio as part of a diversified mix.