Conclusion, Investment Implications, Strategy

According to Reuters this morning:

“Stock markets were deep in the red and some key government bond yields climbed to their highest in years on Thursday after the Federal Reserve signalled the possibility of faster-than-expected U.S. rate hikes and stimulus withdrawal.  Minutes from the Fed’s December meeting had shown that a tight jobs market and unrelenting inflation could require the U.S. central bank to raise rates sooner than expected and begin reducing its overall asset holdings – a process known as quantitative tightening (QT).”

This rise in rates has pushed the yield of the US 10-Year Treasury Note to 1.70%, a level that has contained these benchmark long term rates on the upside since March of last year.  A sustained rise above 1.70% would clear the way for a potentially quick move to the next key yield level at 2.05%.  Moreover, an emerging bearish bet on long dated US Treasury prices, which can be seen in the ProShares Short 20+ Year Treasury ETF (TBF), suggest there is growing conviction by investors that long term US interest rates are indeed headed higher from here.

Note that there has been no meaningful linear correlation between long dated US Treasury prices and the S&P 500 throughout the past two years.

10-Year Yields Testing Important 1.70% Level

Chart 1 below plots a weekly, close-only chart of the yield of the 10-Year Treasury Note since 2012 along with its 52-week moving average, the latter a popular major trend proxy.  The highlights on the chart show that these yields have for the past year been trading within a well-defined range between 1.70% and the 1.47%-1.37%.  The upper boundary of that range is being tested today following this week’s sharp rise in these benchmark long-term US interest rates.

Chart 1

A closer look at this chart shows that long-term US interest rates tend to be a series of large, straight-line directional moves to the next key level on the chart, interrupted by long periods of sideways movement.  A sustained rise through 1.70% would suggest that another such directional move is beginning and would likely result in a test of  2.05%, which is the next clear overhead level on the chart.

Corresponding Underlying Support Levels In Price (TLT)

Chart 2 below plots the iShares 20+ Year Treasury Bond ETF daily since January 2021 with its 200-day moving average, another major trend proxy (like the 52-week MA as shown above).  TLT is essentially the price version of US 10-Year yields and, of course, moves inversely to them.

Chart 2

The red highlights show that TLT has collapsed below its 200- day MA over the past two sessions, which suggests an emerging major bearish trend change.  The green highlights identify the next several support levels below the market.  Like 10-Year Yields, a breakdown below one level would clear the way for a potentially sharp decline to the next level.

ETF Investors Betting On A Tactical Rise In Yields

Chart 3 below plots TLT daily since August 2021 in the upper panel with a corresponding chart of the daily total net assets invested in the ProShares Short 20+ Year Treasury ETF (blue line) and their 21-day moving average (red line, our Tactical time period) in the lower panel. TBF is the inverse version of TLT, for those who want to bet on a decline in long-dated Treasury prices (and a coincident rise in US 10-Year yields).

Chart 3

The rightmost green highlights in the lower panel show that these assets rose above their 21-day MA as of Jan 4th, indicating a new trend of monthly asset expansion that represents a Tactical bet on a deeper decline in TLT.  The gray highlights on the left side of the chart show that a similar period of monthly asset expansion in TBF between mid-August and late October coincided with a significant decline in TLT.

As long as this new trend of monthly asset expansion in TBF continues, it will suggest that there is enough near-term conviction in the marketplace to drive US 10-Year yields above 1.70% and to the next key overhead level at 2.05%.