At Tricio we like to look at charts in order to gauge market sentiment and investor action. Market surveys and fund manager comments can mask a lot of thinking, but price action – real money flowing in and out of asset classes and changing price levels – are the ‘footprints in the sand’ that signal what is really going on. The chart below is the monthly chart of the UK 10-yr. gilt yield. Yields have been a lot higher in the past, but the Truss tantrum of 2022 is clear in the chart as is the struggle to really break above the 4.6%/4.75% zone in this cycle. At the moment yields are pressing lower with rising line support at the 3.75% area under pressure. This makes sense as inflation seems to be under control and the Bank of England has already started to lower rates. They may hold steady at their meeting on 19th September, but lower rates are likely in this cycle. The UK economy is holding up, but economic activity is not exactly roaring higher. On the fiscal side, the Labour government seems to be adopting a ‘hair shirt’ approach to life and is floating ideas about increased taxation and reduced spending. The curtailment of winter fuel payments is a warning shot, and economists are taking note.
The weekly chart below shows the gilt yield along with the 13 and 50-week moving averages. The averages show a falling yield trend, and the pressure on the 3.75% line points to big downside risk. How big? A simple topping pattern (messy double top or rounding top, head and shoulders top if you ignore the lack of symmetry etc.) would suggest that yields could fall towards 2.25%. This is very far away, but the peak near 4.75% happened when the rising line was near 3.25%, giving a 150 bp difference. Take this difference from the 3.75% level (where the same line is now) and 2.25% is the answer. For our purposes, we note that target and are seeing this as an extreme risk. Possible, but not our central forecast. The direction of travel is for lower yields though, and investors should be noting that yields may be below 3.5% in a few months and could well be knocking towards 3% early next year. Yields may break below 3% towards 2.5% in this cycle, which is something that yield investors may need to think about. We are using the 4% area as near-term yield resistance to watch, with the 4.4% area key above this ahead of the 4.6%/4.75% levels. Watch out below!
Gerry Celaya
Chief Strategist
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