We have written a few blogs over the years that explain why we look at charts and my background as a bond analyst (including prop trading, fund advisory and current work with my Tricio partners). Our view that bond yields would be rising sharply after the record lows seen during the Covid shut down of the economy worked, and we called for a bond yield peak in 2023 after bonds found buyers on probes of 5%. More recently, we argued that a sustained dive to lower yields was not a ‘sure thing’ even as the 10-yr. note was pressing on 3.8%, and that bond yields would be very choppy this year. So far so good.
The problem now is that bond yields have surged back to within striking distance of their 2023 yield peak. This is, in our view, presenting bond investors with another bite at the cherry, on the view that it is better to buy a 10-yr. note with a yield near 4.6% than 3.8%. The risk is that the US economy continues to power along, inflation readings tick higher and the Fed raises rates, which in whole or in part, could drive bond trader sentiment to think that a 6% handle (or higher) would make bonds more attractive.
For the purpose of this blog, I am looking at the US 2-yr. note, 5-yr. note and 10-yr. note monthly yield charts. 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 60-month moving average. We noted in March 2023 that if the 5% area gave way on a sustained basis then the 5.7%/6.0% area would be expected to attract. Yields pushed to 5.26% in late 2023 but retreated very rapidly. The press lower found support just ahead of the 4% support area, and yields are rising again. The orange line near 5.29% marks the 2006 peak, and serves as the big barrier to watch ahead of the 5.75% and 6% levels. The latter (horizontal red line, top) marks an important low, and should be seen as a ‘break this and oh-oh’ sort of level. 8% and even 9.4% would be at risk – big oh-oh indeed! We are still leaning to peak yield being in place here so ideally 5% won’t give way on a sustained basis, and the 5.30% area holds. A retreat (again) to 4% is expected this year, with 3.6% key below this. 3% targets would be open further out, with some potential to break this for 2% on a very long-term view.
The 5-yr. note yield chart below (monthly with 60-month moving average) saw yields peak at 5% in 2023. We noted risk of seeing yields rising to 5.2%/5.3% back in March 2023, marked by the orange line from the 2006/2007 peaks. If the 2023 5% peak gives way this zone will be key to hold else 6.3%/6.4% and even 8.2% would be legitimate technical risk levels to watch out for. Chart support is at 3.4% ahead of 3% and then the 2% area.
The chart for the US 10-yr. note yield below (monthly chart with 60-month moving average) shows the peak near 5% in 2023. We noted risk for a rise to 5%/5.2% back in March 2023 and view the push just above 5% in 2023, and retreat, as marking the peak for this cycle. The risk is that this is wrong and a sustained break of 5%/5.2% would leave 6%/6.2% open, with key resistance above this near 6.7% and 7%. We still don’t look for the latter to be hit in this cycle, but all of the focus is on the current yield push higher just now. If the 5% area holds off this yield upswing then watch for another dip to 3.8% to set up 3% over the coming year.
Bottom line? The current upswing in yields is worrying, but was (to some extent) expected to happen. We still expect the Fed to lower rates this year, but clearly the market has been wrongfooted in their expectations of 6 rate cuts that were supposed to start in March. Much depends on the run of inflation and economic activity data over the coming months. Technically, the risk levels to watch are the 2023 highs, see if these hold.
Gerry Celaya, Chief Strategist