How Far Can Bonds Fall As Interest Rates Rise Again?

J.P. Morgan Chase Chief Executive Officer Jamie Dimon says we can expect 6 or 7 interest rate increases this year.

This surprised a few bond analysts on Wall Street this week who had been adjusting their forecasts to maybe 4 interest rate hikes. Anyone who owns bonds is probably thinking about it seriously at this point.

How far can they drop anyway?

Some of the talk about rate rises is already affecting the debt instruments and it’s likely a good deal of anticipation is priced in. On the other hand, if Dimon is right and there are more rate hikes coming than most thought, where is the bottom for bonds and the top for rates?

Here’s the daily price chart for the iShares 20+ Year Treasury Bond ETF, a kind of benchmark for the sector:

You can see that the price is now below both widely-followed moving averages, the 50-day and the 200-day — and that the shorter-term moving average is beginning to trend downward.

The moving average convergence/divergence indicator (MACD, below the price chart) is showing a negative divergence between the July high and the early December high. A closing price below the October low would tend to confirm a bearish tone.

The weekly iShares 20+ Year Treasury Bond ETF looks like this:

That big March, 2020 bar has mostly defined the upper and lower price range for the recent past. That dip below it in March, 2021 turned the 50-week moving average back down and this week, the ETF closed below it again.

The 200-week moving average continued upward but how long can this continue if rates begin to rise? That red-dotted line from the October/November, 2019 lows may be the first target if real selling commences.

Here’s the monthly price chart for the iShares 20+ Year Treasury Bond ETF:

It’s been a sweet and profitable ride if you purchased bonds in 2007/2008 when no one was really interested. Price has traded above the 50-month moving average since then with only occasional dips toward or just below it.

This bond benchmark ETF has never traded below its 200-month moving average at anytime for the life of the chart. Note that huge buying volume bar (below the price chart) for March, 2020.

If bonds sell off from here in a big way, then that 105 area from the late 2016 low and the late 2018 low might be an area of buying support.

Here’s the point-and-figure chart for the 10-Year Treasury Note yield:

You can see that the yield popped above the previous 2021 highs and made it up to 1.80% already in 2022 (chart shows basis points). The next target is likely that 2018 level at 2.00% and then, eventually, 2018’s 3.30%.

If Jamie Dimon is right, it’s a good guess that this chart will show even higher yields before the end of the year.

Not investment advice. For educational purposes only. Always consult with a registered investment advisor before making any decisions.