Friday, October 9, 2009

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.

6 comments:

dacian said...

D-man here (sorry for being so active), I'm reading you daily :)

"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.""

On top of that you gave the dollar index closing the week below the divergence bar at 76.49
As per you last call on the $, this should accelerate things down.

Have a great weekend!

dacian said...

Sorry for my english...

"On top of that you have the dollar index..."

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Anonymous said...

When you say secular change in trend of equity, so you are saying that stock market is going to change to secular bull from secular bear?!

Guy M. Lerner said...

Car Publisher:

I don't know if I should remove your comment or just respond by saying, "Ask the Government"

Anon:

I re-read the article and I don't see anything in there about equities undergoing a secular trend change; yields have the technical characteristics of an asset that is poised to go from bear to bull or low to high yields and it should do it in a meaningful way over a meaningful period of time (> 12 months let's say)

Anonymous said...

Guy, (I'm the first Anon), Ok I guess I "assume" wrong. But the correlation between TNX and equity (SPX let say) is pretty clear though. IF economy goes down (SPX goes down) and so does TNX. If it goes back so do both. It seems TNX lead SPX by about 3 month on the turn around March. So what I was thinking that when you say secular change in TNX then it would mean secular change in equity too?

But the thing that bothers me is that with "normal" economic growth where growth is base on "real" productivity not "borrowed money" then it makes sense that rising interest will come with rising economic activity since people are able to "afford" higher interest. But since our economy is base on "borrow money", fake growth, not on real productivity, then wouldn't rising interest (ie TNX) be bad? So if TNX were to go above 4% or 5% then it would really kill our economy (and government) because there no way we can pay interest because we MAX OUT ON CREDIT ALREADY! Right?

So if countries who lend us the money suddenly realize that we can't pay back we will have a sudden sky rocketing interest rate which in that case is not cause by economic growth but by the lost of faith of our "lender" correct?