Written by John Lounsbury
Treasury interest rates are now looking down, that is, which means that prices are looking up. The 10-year bond closed Friday at 2.31%, the lowest closing rates since 2.20% 20 June 2013. This is not where many predicted at the beginning of the year that Treasuries would be in 4Q/2014. In early January the 10-year yielded 3% with many thinking it would move to higher yields in 2014. But the 3.01% at the close on 03 January was the last time a closing yield has been seen as high as 3%.
The following graph from the U.S. Department of the Treasury Resource Center has been annotated by Econintersect.
Will the Treasury market find a bottom here for rates and again move higher? Or are we looking at the possibility of testing the 2% yield level for the 10-year?
The graph shows the technical elements at play. Here are some things that could keep the 10-year above 2% for now:
- The bond is still within the down-trending trading range; the bottom of that range won't reach 2% until early May 2015.
- There is reasonable technical support from the consolidated trading between 2.14% and 2.25% from 28 May to 18 June 2013.
Here are some technical factors that could support a decline to 2% pretty quickly:
- The rate has almost completed the drop through what is analogous to a one week gap up 14 June to 21 June 2013 (orange on the chart); when gaps are filled the most recent trend is often continued. Watch for a close below 2.20% which is not reversed the next day as an alert that 2% is much more likely very soon.
- If the rate moves below 2.2% the many days closing very close to 2% in February and March 2013 will act as a "magnet" for the current move; Once there (2%), there is good technical support not to drop further.
Back in July 2012 there were five consecutive days with closes below 1.5% yield. What are the prospects to get there again?
At this juncture it seems that would happen only if the global economy was falling apart. So maybe there is reason to anticipate the lowest point for Treasury interest rates is likely to be 2% or higher.
But wait a minute. Why is the stock market struggling right now? Is it because of worry that the global economy is falling apart?
Bottom line, we can talk all we want about the technicals but ultimately Treasury yields will reflect fundamentals in the economy. Therefore, as long as Europe and Japan appear to keep heading toward recession and China continues to produce slowing growth, the pressure on Treasuries is toward lower interest rates.
Notes from others on interest rates
- Van Hoisington and Lacy Hunt (GEI Investing): In Early July when the ten-year was yielding about 2.6% they forecast lower rates for the 30-year bond for the rest of the year. At that time (30-year yield was around 3.4%) they said they expected yields to drop to the 1.7% to 2.3% range over the next seven years. The 30-year yield closed at 3.03% Friday (10 October 2014).
- Lance Roberts (end of July GEI Investing) pointed out that a significant sell-off in junk bonds was underway. He said that indicated that there would be either a significant rise in interest rates or a decline in stocks. Since that was written the S&P 500 is down almost 4% and the ten-year Treasury has moved from 2.48% to 2.31%. At this point we pick his decline in stocks option.
- Lance Roberts (middle of September GEI Investing): "I have been and continue to be long-term bullish on bonds." He cited global deflationary pressures being behind his assessment that stocks were fairly valued and bonds were undervalued, Since that was written the S&P 500 is down 4% and the 10-year Treasury yield has moved from 2.60% to 2.31%.
- Jim Welsh and the Macro Strategy team at Forward Markets have been bullish on bonds since the beginning of the year when they projected a decline of ten-year Treasury interest to 2.5%-2.7% in 2014. By the beginning of March, when the yield was 2.70% they moved their target to 2.46% -2.58%. See early March GEI Investing. In their most recent report just this week they projected a low yield around 2.30% with a rebound back toward 2.6% ensuing. Global deflationary pressures will not allow the higher yields of early 2014 to be regained this year, in their opinion.
- EconMatters has taken the opposite side of the trades backed by the other contributors above. In August they called a bottom for Treasuries with the ten-year yield at 2.35%. We are close to that now and the call may still prove accurate. In September, with the ten-year yield at 2.50%, EconMatters recommended shorting Treasuries for the rest of the year. As of Friday (10 October) that trade, using NYSE:TBT, is down over 8%.
- Bond guru Jeffrey Gundlach has called for a bull market in bonds since the beginning of the year while a guru of longer standing, William Gross, has been negative on bonds for a couple of years and, in part because of that, has lost his job with PIMCO, which he co-founded.
- Some other bond investors are bullish, like Guy Haselmann of Scotiabank, who is looking for 30-year Treasury rates to get down to 2.5% in 2015 (currently 3.0%).
- But many more are looking for higher rates, and some much higher. Watch a video interview below of Francesco Garzarelli of Goldman Sachs, for example, who sees a global bear market for bonds, although he admits to losing money this year.