Written by John Lounsbury
The 10-year treasury yield has just edged below 3%. This is a critical support region for yields. If there is not a move back up next week, two big interest rate drops may develop.
Back on November 19 I was involved in a short exchange on Twitter about prospects for interest rates.
Well, the truth of that projection is about to be tested. There are two major support level regions below 3%. The first is in the mid-2.8 area. If rates were to break below 2.8% there is a free-fall region all the way down to 2.4% or so.
Might this much of a decline occur? I say it’s possible for no other reason that few expect it to happen. When all the bets on higher rates unwind the damage would be spectacular.
What economic conditions would warrant a big bull move for bonds? (Note: Bond prices go up as rates come down.) Well, with one more rate hike as expected in December, the Fed Funds rate will be at 2.5%. A subsequent move of the 10-year down to 2.4% would invert the yield curve out to 10 years. An inverted yield curve has accompanied the last 8 recessions.
There are a few who are anticipating global economic conditions that would support a bond rally. See for example this short discussion by Daniel Lacalle:
The next three months may get very interesting in bond markets. Or this may be just a false alarm and interest rates will rise again. We could know in as few as 10 days or the direction may not be clear until after the turn of the new year.
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