We look at bond yields instead of prices in order to avoid the difficulties presented when rolling from benchmark issues (‘on the run’) that different coupons and maturities would represent. This seems pretty obvious now, but back when I cut my teeth in the research industry, getting data and charts on bond yields was not that easy. In fact, I was a human calculator (Monroe calculator!) putting up yield quotes on a Telerate machine (!) for intraday blotter updates, and also used microfiche machines in order to get historical Fed bond yield data in order to plot charts by hand, and update data bases. Today, many services provide serviceable yield charts with decent historical data.
Most of the usual technical analysis tools work well for bond yield chart analysis. One thing to watch out for would be equity market chartists who may want to use semi-log charts while looking at bond yields. Keep in mind that low yields already exacerbate price moves compared to higher yield price moves (a 10 bp move from 2.0% to 2.1% has more price implications than a 10 bp from 7.4% to 7.5%, a convexity problem), so using a semi-log chart would only make this worse.
For the purpose of this blog, I am looking at the US 2-yr. note, 5-yr. note and 10-yr. note yield charts going back to the early 1980’s. The lines that I put on the chart are from key lows. I use these as turning points as breaking a key low means a lot for market sentiment. Regaining this key yield low gives an important sentiment signal.
The 2-yr. note yield chart below is a monthly bar chart with a 5-year moving average. If the 5% area gives way on a sustained basis then the 5.7%/6.0% area would be expected to attract (blue line zone). There is some risk that this would give way for a push to the 8% and even 9.4% area, but this is not expected in this cycle. Support is layered at the 4% to 3.6% area.
The 5-yr. note yield chart below shows pressure on the key 4.5% area line could build. A break of this area would leave the 5.2%/5.3% area open further out (blue line) which seems possible. The top line near 7.5% seems unlikely to be tested in this cycle, while chart support at the red line is clear near 3.4%.
The chart for the US 10-yr. note yield below shows that key resistance at the 4%/4.3% area is under pressure again. A sustained turn higher to 5%/5.2% (blue line) is at risk. The top line near 6.7%/7.0% is a clear risk, but this is not expected to be reached in this cycle. The red line offers support at the 3% area (3.3% is key ahead of this as a recent low).
Bottom line? Big levels are in play, simple chart analysis suggests that there is still some upside risk in US bond yields. We are looking at the 2-yr. note yield as the leader here, given the stage of the Fed rate hike cycle that we are in. Any hint of the Fed looking to pause their rate hikes should see the market slam the brakes on higher yields here first. The ‘pause or pivot’ argument will make curve trades very interesting over the coming months. We favour pausing for a while, but the market seems keen to price in ‘pivot to lower yields’ risk when ever it can.
Keywords: technical analysis, bond market analysis
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