Long End Historically Oversold

Aug 7, 2023

Treasury yields at the long end of the curve are once again rising today with the yield on the 30 year up 3.3 bps as of this writing. That is in the context of what has already been a dramatic move higher in yields of long term Treasuries. As we discussed in Friday’s Bespoke report, the ETF tracking longer-dated Treasuries, the iShares 20+ Year US Treasury ETF (TLT), fell 1% or more three days in a row last week (prices fall when yields rise).  Meanwhile, that move higher in long end yields has also been observed in other places of the world like Germany, as discussed in today’s Morning Lineup.

Given the steep rise in yields and hence a drop in the price of TLT, the ETF is trading at extremely oversold levels.  While it has come back slightly and is currently 2.66 standard deviations below its 50-day moving average, at the most oversold reading last Thursday, TLT traded 3.84 standard deviations below its 50-DMA. In its over 20 years of history, that is the most oversold reading on record.

As shown above there have only been a handful of other periods in which TLT has fallen at least three standard deviations below its 50-DMA as it did last week. In most circumstances, when an asset reaches such extreme levels of oversold, the thinking is that some upside mean reversion can be expected. However, the exact opposite has played out for TLT historically.  As shown below, across the prior seven instances in which TLT got 3+ standard deviations below its 50-DMA, the ETF was lower a year later four times.