Talking Numbers

Bond investors take note: This could be trouble

Bond investors take note: This could be trouble

Should bond investors be worried? The charts say yes, according to one technician.

The price chart of the benchmark U.S. Treasury 10-year note shows what looks to be a "triple top" pattern over the past several months, according to CNBC contributor Andrew Busch, editor and publisher of the Busch Update. While the name may sound benign, a triple top is anything but. Why is that? Because the pattern represents an exhaustion of buyers.

In this case, that could mean a selloff for bonds, and higher rates. Yields have stayed in a range between 2.6 percent and 2.8 percent since late January. As of Thursday, the 10-year's yield was just shy of the top end of that range, closing at 2.79 percent.

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But there is another indicator that Busch said could also be trouble: the bond's 10-day and 30-day moving averages.

"I take those moving averages and apply them to a lot of different stock and commodity graphs to see if they work," said Busch. "Sometimes, they're great and, in this case, this works really well."

Using a moving average crossover trading strategy, traders buy when the shorter-dated moving average is above the longer-dated moving average and sell when the opposite occurs.

"This is telling you stay short because the 10-day moving average is below the 30-day moving average," said Busch, "and we're getting near the higher end of the yields/lower end for price. We may see this thing break above that 3 percent yield on the [Treasurys]. I'm looking for [bond prices] to continue to go south."

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CNBC contributor Gina Sanchez, founder of Chantico Global, concurs with Busch that bonds are headed down.

"The outlook for yields is higher," said Sanchez. "All things being equal, they should have risen more than they have. But we had a few surprises."

Those surprises include the Russian takeover of Crimea, concerns about China's growth and other emerging market issues as well as the effects of the harsh winter on the U.S. economy. Sanchez believes the U.S. macroeconomic picture will start to improve but she doesn't see the 10-year's yields breaking too far above 3 percent.

"I think they're somewhat capped," said Sanchez about yields." Inflation is still very low and expectations are very low. So, I think you need to watch inflation expectations because that's going to be the key to how high yields can go."

To see the full discussion on what's ahead for bond yields, with Busch on the technicals and Sanchez on the fundamentals, watch the video above.

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