10 Year Treasury Yields: The Technical Take

It has been awhile since we last looked at the technicals on the 10 year Treasury yield. However, today's 4% plus pop in the yield has my attention.

First, this is what I said on September 15, 2009 on Treasury yields:

"...earlier in the year, I thought that Treasury yields would head higher (i.e., bonds lower), and that this would result in a secular trend change. In other words, we would be embarking on a long period of increasing yield pressures. This did not come to pass although yields on the 10 year Treasury bond did reach 4.0%. Despite this failed signal, Treasury yields still have the technical characteristics of an asset poised to undergo a secular trend change, and by secular, I mean lasting years. But not now.

For now, I think a better bet is on higher Treasury bond prices. At least over the next couple of months."

At that time and over the next 3 weeks, this seemed like a good "call", but the last 2 days have seen all those gains on Treasury bonds given back. For example, the i-Shares Lehman 20 plus year Treasury Bond Fund (symbol: TLT) is now trading slightly above those September 15th prices.

The news of the day -that could be the driver of higher yields - really isn't news at all. If anything it is good old fashion jawboning by Bernanke in an effort to get the Dollar up. From Bloomberg:

"The Fed will need to raise rates “at some point” to control inflation, Bernanke said at a Board of Governors conference yesterday in Washington."

Bingo! Rates are up; the Dollar is up. We are inflation fighters - for a day. Of course, this is not news, and of course, what do you expect them to say? "We will keep rates low forever because we don't have the political will to raise them." Nonsense.

In any case, let's look at the technicals and get a better idea where things stand. See figure 1 a weekly chart of the 10 year Treasury yield (symbol: $TNX.X).

Figure 1. $TNX.X/ weekly

Starting about 2 weeks ago, yields bounced off the most recent lows at about 3.1%. This has carried prices all the way to significant overhead resistance as defined by the following factors: 1) the prior pivot low point at 3.437%; 2) this also happens to coincide with the monthly pivot low point (not shown) at 3.432% ; 3) the down sloping black trend line formed by two prior pivot high points; 4) a cluster of negative divergence bars (marked in pink); we know that the lows of the negative divergence bars should act as resistance.

So from my perspective yields have bounced off support at 3.10% and have traded to resistance at 3.437%, and this resistance is fairly significant. A break of this resistance would likely have a good chance of breaking the long term down trend line (marked in blue). And we should keep in mind that long term Treasury yields have the technical characteristics of an asset class poised to undergo a secular trend change.

However, at this point in time, yields remain in a range; they are at the upper end of that range. There is no news to suggest a game changer here. No technical levels have been taken out in either direction to suggest that a new trend is imminent.

Lastly, if yields do "breakout" and move above resistance, a nice inverse head and shoulders bottom has formed. If this comes to past, yields on the 10 year Treasury could climb to 5.5%. This would be significant and a game changer. For now, we have a failed signal from two months ago within the context of an asset that has the technical characteristics to move higher over the next several years.