Written by John Lounsbury
Don’t look now without sitting down if you have not been following U.S. Treasuries: The 10-year is again yielding less than 2.5%. This is not what many fixed income experts have been expecting. The widely accepted concensus has been that the trend in interest rates would be higher, the policy pause from the Fed notwithstanding.
Please share this article – Go to very top of page, right hand side, for social media buttons.
Macro Tides analyst Jim Welsh has followed the 2019 rally in Treasuries and notes this week that the large short interest outstanding could still produce a further rally in the very near term (lower rates) but that an inflection point is likely near. Jim has speculated it could come before the middle of June.
So what should traders and investors be looking for to catch this inflection point, should it arrive?
First, let’s look at the nearly 60-year chart for the 10-year yield to gain some broader perspective. (Chart courtesy of macrotrends.net.)
Click on any graphic below for large image.
.
The current levels of interest rates are at values not seen in the past 60 years. In fact, only in the Great Depression and World War II years have interest rates been this low over the entire history of the country, as seen in this graphic from CNBC:
.
Since 1981 there has been a bull market for bonds which has far outstripped any bull in U.S. history. It may be that the interest rate lows in July 2016 may have marked the end of that bull.
.
The chart above shows trend lines consistent with the end of the bull market (falling interest rates) and the start of a bear market for bonds in July 2016.
There was a bear market correction in 2017 as yields declined from about 2.6% to 2.05% over 9 months. Then the bear trend resumed to a high rate near 3.25% at the beginning of October 2018. Since then there has been another correction lasting nearly 9 months to the current rate of 2.45%.
Question: Is the current market a mirror image of the 2017 correction or could the bond rally be extended?
The 12-month chart makes clear that we won’t have to wait long to find out.
.
The trading channel for the current trend is quite steep and in the shape of a descending flag. In order for the current trend to continue the 10-year yield will have to fall below 2.3% in less than 6 weeks because that is where the resistance line (upper boundary of the channel) will be in that time. If there is an inflection point for treasuries this decline will not happen and the upper boundary of the flag will be violated very soon.
Why is this important? Such trend channels and flags are widely watched and traders will take action if there is sustained indication a trend has ended/reversed.
So watch the market closely in the next few weeks. It is very possible the current nearly 9-month down-trend for rates will end and the bear market for treasuries resumed – unless, of course, the economy tanks and the Fed is forced to cut rates giving the treasury bull new life.
Recommend you read the Macro Tides Weekly Technical Review early every Tuesday morning where Jim Welsh has a thorough update of all markets, including Treasuries, and will be one of the first to make note of trend changes. This week’s article is here.
.
