"Watch The Russell" & Don't Fade The Bond Rally, BofA Warns

Via BofAML's Macneil Curry,

10yr USTs threaten the US $

US 10yr Treasury yields take center stage next week. After 3 months of range trading, they have resumed their year-to-date downtrend. The Friday Bearish Outside Bar (a bearish chart pattern indicating further downside) and closing break of the 2.591% range lows says lower 10yr yields are coming. We target the 2.420%/2.399% multi-year pivot zone and potentially below. DON’T FADE THIS BREAKDOWN. Watch US equities.

While the S&P500 is still constructive, small caps and tech remain vulnerable. Indeed, the Russell 2000 is dangerously close to its 200d moving average, a close below which could lead to a bout of risk aversion and be the catalyst for further yield weakness. From an FX perspective, the 10yr yield breakdown threatens our bullish US $ index / bullish $/CHF and bearish €/$ view. HOWEVER, FOR NOW WE ARE STICKING TO OUR GUNS. A break below 79.26 (US $ Index), 0.8699 ($/CHF) and above 1.3967 (€/$) forces us to reassess. In contrast, the yield breakdown increases our n/term bearish conviction on $/¥.

Chart of the week: 10yr Treasuries return to trend

The Friday Bearish Outside Bar and close below the 3m range lows say that 10yr yields have returned to a downward trending environment. In the sessions weeks ahead we target the 2.420%/2.399% pivot zone and potentially below.

Watch the Russell 2000 and its 200d avg

We are becoming increasingly concerned about small cap and tech stocks. Indeed, the Russell 2000 is dangerously close to its 200d (1113). A closing break below would expose 5yr trendline support (1057) and could lead to a bout of n/term risk aversion. This is bullish Treasuries.

Bullish US $ index view at risk. 79.26 is KEY

The breakdown in US 10yr yields threatens our bullish US $ Index outlook, as well as our long $/Chf position and topping view in €/$. However, for now we are sticking to our call. A US $ Index break of 79.26 (the Mar-13 low) says our view is misplaced and opens significant US $ index downside.

$/¥ takes aim at its 200d avg and below

In contrast to our bullish US $ Index view, we remain near term $/¥ bears. Indeed the breakdown in 10yr yields adds to this bearish conviction. In the sessions ahead we look for a test and break of the pivotal 200d (now 101.00), targeting the 99.37 swing target.