A Signal to Buy 30-Year Bonds

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A technical indicator with a reliable history is signaling that 30-year Treasury yields will soon decline.

A relative strength index (RSI) can be measured for any price series and represents how much and in what frequency gains are occurring versus losses. The index is used as a contrary or turning-point indicator. After periods of strong persistent selling, buying is expected and vice versa.

It isn’t a complicated calculation. The RSI takes the average price change of days with gains as compared to the average price change of days with losses over the last x days. This is converted into an oscillator that can take any position between 0 and 100. When prices (or yields) are rising fast and persistently, the oscillator will approach 100; when selling occurs with lower prices, it will approach 0. The oscillator spends most of its time in the middle; say between 30 and 70. Extreme readings (close to 0 or 100) happen rarely. These extremes can be studied historically to see how useful the index is at identifying major turning points in markets.

The RSI on the 30-year U.S. Treasury yield

For this analysis, I looked at the RSI on 30-year U.S. Treasury yields measured with a 14 day average (the x in the description above). This is the longest and most conservative daily average generally used. I looked at historical times where the RSI equaled or was greater than it was at the close of Wednesday, 2/24/2021, at 78.

A reading of 78 (or more) is rare, happening in just seven periods going back to 2000; about once every three years. You can see them in the chart below. Focus on the high extremes that rise to or above the blue threshold line of 78.