Bond prices are on the rise this week after the Federal Reserve again sounded a dovish call.
The 10-year yield declined to its lowest level in 15 months on Thursday, a day after the central bank suggested it would not hike rates in 2019 in response to signs of slowing economic growth. Bond prices, which move inversely to yields, typically rise in response to expectations of weaker growth as investors flock to low-risk assets.
"They're also reducing the rate at which the balance sheet shrinks so they're trying to keep the balance sheet — which consists of U.S. treasuries and mortgage securities — trying to keep that high to keep interest rates low," Todd Gordon, founder of TradingAnalysis.com, said on CNBC's "Trading Nation" on Thursday.
The Fed said it would reduce the amount it rolls off its trillion-dollar balance sheet in May and then end the program in September. Since October 2017, it had paired balance-sheet reduction with rate hikes to tighten monetary conditions.
A Federal Reserve pressing pause should give rise to bond prices, says Gordon.
"That, in theory, is supposed to force savers into the stock market, buy more stocks, push stock prices higher, but one thing I think it will also do is push bonds higher, if there's not more supply coming to market," he said.
The TLT 20-plus U.S. Treasury ETF is also flashing a technically bullish signal, says Gordon. He sees an inverse head-and-shoulder pattern forming — a low in early 2018, a lower low in November, and a higher low at the beginning of this year.
"Shorts don't have the power to push to new lows, so if shorts are falling behind, buyers are growing more aggressive, they should be able to punch us out of that resistance zone," he said.
Gordon is buying the April 26 123/125 call spread for roughly 71 cents. This is a bullish bet that the TLT will climb above $125 before the contract expiration.
The TLT ETF would have to rally roughly 1.8 percent before hitting $125. The long-term bond ETF has risen nearly 2 percent over the past week.