The US 30-Year Treasury bond yield remains on track for new all-time lows in the weeks ahead, according to BofAML's MacNeil Curry, on the basis that crude oil prices will begin to stabilize. With the WTI curve at extreme contango, Curry suggests the downtrend is finished, and this is a very high probability location for a base to develop.
2 bullish developments for oil
For the week ahead our attention is on the oil market. Specifically, WTI futures are fast approaching 16yr trendline support which halted the decline of 2008/2009. Furthermore, the slope of the WTI curve (the 1m-12m futures contract spread) is now at bearish extremes from which price lows have often coincided. While it is too early to say that the downtrend is over, both of these indicators say that it’s time to start looking for signs of basing. Such a development should be positive for risk assets and many EM currencies (watch MXN & BRL, both have completed Bullish Outside Week patterns vs the $). Finally, stabilizing energy prices should have little if any follow through to the back end of the US Treasury curve. 30yr yields remain are on track to make new all-time lows in the weeks ahead.
Chart of the week: Oil contango reaches bearish extremes
The 1m-12m WTI spread (CL1-CL12) moved into contango back in early November.
Now that contango has reached bearish extremes from which price has often found a base. With the exception of 2008/2009, when the front month future contract trades at a $7.50 discount to the 1yr contract, it has often coincided with a market low or the start of a larger basing process.
WTI nears long term trendline support
With the WTI curve at extreme contango, our attention is drawn to the fast approaching 16yr trendline between 46.13/45.22. While there is not yet enough evidence to say that the downtrend is finished, this is a very high probable location for a base to develop. Watch it closely.
Stay bullish the long end of the US Treasury curve
Stabilization in energy prices should have little effect on the long end of the US Treasury curve. 30yr yields remain in a well-defined downtrend, with Friday’s Bullish Outside Bar indicating that the downtrend is resuming. Initial targets are seen to 2.462%, one year channel resistance, through which targets 2.261% and potentially below. Bears need a break above 2.660%/2.671% to gain control.



