By Richard Leong
(Reuters) - A bond market rout that drove yields through key levels has some investors prepared for another leg that may finally declare an end to a three-decade-long bull run.
The $15 trillion Treasuries market tanked on Wednesday, with the 10-year and 30-year yields racing to seven-year and four-year highs, respectively. Traders again dumped U.S. government debt on Thursday following upbeat economic data and hawkish remarks from Federal Reserve officials.
Then a solid jobs report on Friday extended the market sell-off, propelling yields - which move inversely to prices - to fresh multi-year highs.
"The last man standing was the 30-year, and it has definitively broken above a multi-year base that should over time carry us to significantly higher yields," said Jeffrey Gundlach, chief executive officer of DoubleLine Capital, who manages $123 billion.
Rising bond yields, which in turn make borrowing more expensive for consumers and corporations, knocked Wall Street stock prices lower for a second day on Friday. The pullback in equities has spurred safe-haven demand for Treasuries, slowing the rise in yields.
Some key levels that investors are now focused on are around 3.25 percent for the benchmark 10-year and 3.50 percent for the 30-year. The 10-year and 30-year yields hit 3.240 percent and 3.4050 percent, respectively, at midday Friday.
For the week, the 10-year yield is on track to rise nearly 18 basis points, which would be its steepest weekly increase in eight months. The 30-year yield is poised to increase almost 21 basis points, which would be its biggest weekly jump since last November.
Technical signals suggest bond yields may rise further, especially on the longer-dated debt, and at least stall the likelihood the yield curve would invert as the Fed will likely push short-term rates higher.
Some of the bearish indicators included a surge in open positions in Treasury and interest rates future and in bond market volatility, which spiked to its highest level since June on Thursday.
"Wednesday's breakouts now have analysts rushing to historical charts to indicate likely upside yield objectives," said Karl Haeling, vice president at Landesbank Baden-Wurttemberg.
Treasury yields blew past key technical levels three days ago. The relentless wave of selling has driven the 10-year yield to a seven-year high and 30-year yield to a four-year peak on Friday.
Next week's Treasury supply, including $74 billion in coupon-bearing issues faces a crucial test of investor appetite at these elevated yield levels, analysts said.
Investors are hesitant about calling the end of the bull market for bonds, as whenever yields hit technical levels opportunistic buyers flood in. Some analysts reckoned the two-day selloff is overdone and can reverse quickly if Friday's jobs figures, particularly on wages, fall short of forecasts.
NEXT YIELD LEVELS
Gundlach has had his eye on the 30-year yield, predicting that two closes in a row above 3.25 percent would be a bearish sign for the bond market. This happened on Wednesday and Thursday.
The next technical level traders are looking for the 30-year to hit would be 3.39-3.40 percent area, and then 3.50 percent.
Traders are also focused on the benchmark 10-year, with psychological support at 3.25 percent, the top-end level of most analyst forecasts for 2018.
The U.S. bond market will be closed on Monday for the U.S. Columbus Day holiday.
STEEPER YIELD CURVE
With worries receding about an imminent yield curve inversion, traders are eyeing the 2-to-10-year part of the curve with a resistance level above 33 basis points as key. They point out that after that there is no strong technical support before around 50 basis points.
Back in August, the yield curve touched its flattest level in more than a decade at about 18 basis points, stoking concerns it will invert.
Such a move has been a reliable indicator that the economy is heading into a recession since the last century. The past three U.S. downturns were preceded by periods when the yield curve inverted 12 to 18 months earlier.
BEARISH ALREADY
Analysts will be watching data from the Commodity Futures Trading Commission, released every Friday, showing investors' positioning on bond and rates futures before Wednesday's sell-off.
In the 10-year T-bond area, speculators including hedge funds already accumulated a record net level of short bets on Sept. 25. On the other hand, fund managers built a record amount of positions that 10-year Treasury values will appreciate.
VOLATILITY SPIKES
A surge in market volatility may portend another leg-up in yields. The move has raised the premiums on fixed income options and derivatives, making hedging more expensive for bond managers and traders, analysts said.
The bond market sell-off pushed volatility to its highest level since June.
(Reporting by Richard Leong; Additional reporting by Jennifer Ablan; Editing by Leslie Adler and Nick Zieminski)
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