Over The Cliff

Written by John Lounsbury

One month ago we reviewed the downturn in long-term interest rates with a detailed look at the 10-year treasury. The title was “Are Treasury Yields On The Edge Of A Cliff?“. It became clear in the last few days that we actually were on the edge of a cliff and we have gone over the edge. It’s a good time to examine just where this event might take us.

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Here is a key graphic from the 30 November post:

We have rerun that graphic with the elapsed 30 days added:

There seems little technical support for yields above about 2.55% and based on the current view we could go below 2.50% to reach firmer support.

It’s an added point of significance here that the bond rally has occurred on days when stocks were also up. This can be interpreted as an indication of lack of conviction for stocks because if there was support for stocks we would expect to see money rotating out of bonds (yields going up) and into stocks.

Instead the up days over the holidays has come on very thin volumes and cannot be considered the start of a serious rally.

If this assessment is correct, Wednesday could be an ugly day for stocks on higher volume and bonds could continue to rally.

The final nail in this constructed story is that the scenario described would produce further flattening and inversions in the yield curve. Mish has been following this:

If the 10-year does indeed drop yield to the 2.40% region, a complete and strong inversion for most of the yield curve seems assured. That would be completely at odds with the widely held view that there is little sign of incipient recession within the next year.

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