By Richard Leong
(Reuters) - A bond market rout that drove yields through key levels has some investors prepared for another leg that may finally declare an end to a three-decade-long bull run.
The $15 trillion Treasuries market tanked on Wednesday with the 10-year and 30-year yields racing to seven-year and four-year highs, respectively. Traders again dumped U.S. government debt on Thursday following upbeat economic data and hawkish remarks from Federal Reserve officials, and yields - which move inversely to prices - hit new multi-year highs.
“The last man standing was the 30-year, and it has definitively broken above a multi-year base that should over time carry us to significantly higher yields," said Jeffrey Gundlach, chief executive officer of DoubleLine Capital, who manages $123 billion (£94.46 billion).
Some key levels that investors are now laser focused on are around 3.50 percent for the 30-year and 3.25 percent for the benchmark 10-year. The 10-year and 30-year yields hit 3.232 percent and 3.3920 percent, respectively, on Thursday.
Technical signals suggest bond yields may rise further, especially on the longer-dated debt, and at least stall the likelihood the yield curve would invert as the Fed will likely push short-term rates higher.
Some of the bearish indicators included a surge in open positions in Treasury and interest rates future and in bond market volatility, which spiked to its highest level since June on Thursday.
"Wednesday’s breakouts now have analysts rushing to historical charts to indicate likely upside yield objectives," said Karl Haeling, vice president at Landesbank Baden-Wurttemberg.
Treasury yields blew past key technical levels in the initial phase of the selloff, begetting more selling that drove the 10-year yield to a seven-year high.
The market rout continued into early Thursday before selling ebbed on a pullback in Wall Street stock prices and in advance of the government's monthly jobs report due at 8:30 a.m. (1230 GMT) on Friday.
Investors are hesitant in calling the end of the bull market for bonds, as whenever yields hit technical levels opportunistic buyers flood in. Some analysts reckoned the two-day selloff is overdone and can reverse quickly if Friday's jobs figures, particularly on wages, fall short of forecasts.
Graphics: U.S. Treasury yields at multi-year highs (https://reut.rs/2OA5ClY)
NEXT YIELD LEVELS
Gundlach has had his eye on the 30-year yield, predicting that two closes above 3.25 percent in a row would be a bearish sign for the bond market. The market on Thursday closed above that level for a second day in a row.
The next technical level traders are looking for the 30-year to hit would be 3.39-3.40 percent area, and then 3.50 percent.
Traders are also focused on the benchmark 10-year, with psychological support being 3.25 percent, the top-end level of most analyst forecasts for 2018.
They will also monitor whether the 10-year and 30-year yields would test 3.125 percent and 3.25 percent before the end of the week.
The U.S. bond market will be closed on Monday for the U.S. Columbus day holiday.
Graphic: U.S. Treasury yields break support (https://reut.rs/2OvIZiH)
STEEPER YIELD CURVE
With worries receding about an imminent yield curve inversion, traders are eyeing the 2-to-10-year part of the curve with a resistance level above 33 basis points as key. They point out that after that there is no strong technical support before around 50 basis points.
Back in August, the yield curve touched its flattest level in more than a decade, stoking concerns it will invert.
Such a move has been a reliable indicator that the economy is heading into a recession since the last century. The past three U.S. downturns were preceded by periods when the yield curve inverted 12 to 18 months earlier.
Graphic: U.S. Yield Curve (http://tmsnrt.rs/2zUqXiW)
Analysts will be watching data from the Commodity Futures Trading Commission, which is released every Friday, on investors' positioning on bond and rates futures before Wednesday's selloff.
In the 10-year T-bond area, speculators including hedge funds already accumulated a record net level of short bets on Sept. 25. On the other hand, fund managers built a record amount of positions that 10-year Treasury values will appreciate.
Graphic: Commitments of traders (https://tmsnrt.rs/2FaJhTk)
(Reporting by Richard Leong; Additional reporting by Jennifer Ablan; Editing by Leslie Adler)