Tricio has long advocated the view that the US 10-yr. note yield would be heading towards the 2.50% / 3.0% range over the course of this cycle. This means that 2021 was a tough year for us as the initial surge above 1.0% in the 10-yr. note yield fizzled away and much of the year was spent ‘marking time’. This has changed over the last few months though, as the Fed’s rhetoric about removing stimulus and actually tightening policy stepped up in late 2021 and turned positively hawkish recently. This has sent yields up above 2.3% over the last few weeks, flight to safety bids over the Russian attack on Ukraine notwithstanding.
One chart that caught my eye today is the long term chart of the note, as I was preparing my slides for a presentation on behalf of the Society of Technical Analysts (STA) at the University of Brighton next week (along with three awesome chartists, Tom Pelc, Murray Gunn and Simon Warren at the invitation of Dr Rob Hayward, Principal Lecturer, School of Business and Law). The chart is below and shows the yield of the 10-yr. note since the late 1970’s, with Fibonacci ratio retracements from the 15.8% peak to the 0.3% area low. The 23.6% retracement of this drop in yields comes in near 4%, while the more commonly used 38.2% retracement is just above 6%. Also of interest is the falling line from two prominent high points (red) that is currently under pressure.
What does this mean for investors? Well, on one hand, many might say that the bond yield offers better value near 2.3% now than it did last year. The red line (representing demand for the bond, in this case) may hold up and yields may fall away again. On the other hand (showing my economist training here…), a break above this line may be a call to action for many fund managers as this would be a potential ‘regime change’ for the bond market. This line has roughly guided the 10-yr. note yield down for over 30 years. A sustained break of this lower yield trend may see 3% pressed before year end and open up higher bond yield risk in 2023. There are plenty of guesses about the strength of the US economy, the future of inflation risk, how hawkish the Fed will be etc. There should be a chance that US growth holds up better than expected, inflation remains above 2% but not so high that the Fed has to kill off growth, and that the 10-yr. note yield could trot up to 4% without the financial system or world economy falling over, right? How about 6%?