BofA Warns Treasury Regime Change Is Coming

Next week marks the beginning of May and the potential for a regime change in US Treasuries. As BofAML's Macneil Curry notes, historically the month of May coincides with a jump in Treasury volatility. A seasonal analysis of implied Treasury volatility using the MOVE Index (Merrill Option Volatility Estimate) shows that May is traditionally the second strongest monthly of the year after December. With the MOVE Index also showing signs of basing, and 10yr Treasury yields stuck in an increasingly unsustainable narrow range, this May is unlikely to disappoint. While the long term trend for US 10s suggests that Treasury yields should climb higher, in the near term we prefer to take a wait and see approach, watching for a break of the range extremes at 2.825% and 2.591%.

Via BofAML,

Chart of the week: Bullish seasonals for the MOVE Index 

Since 1988 the month of May has consistently seen a rise in Treasury volatility. It is traditionally the second strongest month of the year. With the MOVE index showing signs of basing, this May is likely to remain true to seasonal norms.


The MOVE Index is basing

Price and momentum say that the MOVE Index is setting up for a substantial, bullish turn in trend. Seasonals say that the break is likely close at hand. A break of Wedge resistance (thick red trendline) at 64 would confirm the turn in trend, setting the stage for a push towards 80 and potentially beyond.

US 10yr yields are set for a breakout

The. 3 month range trade in US 10yr yields has taken historical volatility to unsustainably low levels. The last time the 200d Bollinger bands were this narrow was back in May 2007, which preceded a 4wk 55bps rise.

While the l/term trend is bearish; in the n/term, watch the 2.83%/2.59% range extremes and DON'T FADE A BREAKOUT.