Written by John Lounsbury
Ten weeks ago we wrote that Treasury yields were looking down. The day we wrote that the yields on 10-year Treasuries reach 2.31%, a 28-month low. We suggested that the yield could drop below 2.20%, and if it did without bouncing back toward 2.30% within a very few days that the yield could drop to very strong technical support around 2.0%. Well, they have dropped below 2.20%, not once but four times. But they have never gotten down to 2.0%. What gives?
First, let's look at the chart we had in our 12 October 2014 article (from the U.S. Department of the Treasury Resource Center and annotated by Econintersect).
One of the comments about that chart related to the orange numbers noted:
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.
Well, the chart below shows the latest update of the above data, showing only the data from 03 September 2014 through 31 December.
The four dips below 2.20% are to be noted, the last one is the last data point, 31 December.
The lowest interest rate reached during this interval was 2.07% (16 December) and the highest was 2.39% (06 November). These two reference points should be considered the data points to be exceeded to establish a potential breakout from the year-end trading range. The breakout should be considered confirmed if there is a daily close above 2.52% (top of the gap - orange notes first graph) or below 2.00% (support level anchored in early 2013).
What the current trading range appears to be could have as a metaphor a price anchor (or magnet ) at 2.20% (or just above) with a "force field" that extends out to 2.39% or 2.07%. To "weigh anchor" or "escape the force field" one or the other "limit" must be exceeded permanently. We suggest that making long-term bets on Treasuries has little technical justification until "the force is with you".
Happy New Year market trekkers!
PS: There are a lot of opinions about the direction for bonds with links in the October article. One of them is repeated here, a video interviewof Francesco Garzarelli of Goldman Sachs, for example, who sees a global bear market for bonds, although he admits to losing money this year.