US 10-Year Yields: Next Stop 3.75% to 4.00%?

Conclusion, Investment Implications, Strategy

The yield of the benchmark US 10-Year Treasury Note’s recent rise above the 3.24% level clears the way for a potential rise to the next historically important levels at 3.75% and 4.01%.  From a momentum standpoint, however, these yields have reached an over-extended extreme that suggests they may be within a month or two of a Strategic (quarterly) peak.

Introduction

In our March 5th Special Report entitled “US 10-Year Yields Vulnerable To A Significant Countertrend Decline”, we said: “The yield of the benchmark US 10-Year Treasury Note is now testing the 3.05% to 3.35% area, a formidable historical benchmark levels for these yields that is unlikely to be appreciably broken, if at all, without at least a significant corrective move back below 3.00% first.“

The decline back below 3.00% occurred as expected but it didn’t last long as these yields moved to as low as 2.74% on May 27th before rocketing back above 3.00% by Jun 8th due to increasing inflationary pressures and with them the expectations for a very aggressive fed to combat the problem.

10-Year Yields Making Yet Another Technical Breakout

Chart 1 below plots the weekly closing yield of the US 10-Year Treasury Note since 2012 with its 52-week moving average, the latter which we use to identify the annual trend.  The major yield support (green) and yield resistance (red) levels are also identified.

Chart 1

The chart shows that, over just the past 4 sessions, these yields have risen above their 3.23% October 2018 benchmark high.  This clears the way for further yield strength and an upcoming test of the next overhead yield resistance levels at 3.75% and 4.01% which represent the February 2011 and April 2010 benchmark highs.

Chart 2 below plots the CBOE 10-Year Note Index (TNX) weekly since 2007.  TNX is based on 10 times the yield-to-maturity on the most recently auctioned 10-year Treasury note.  

Chart 2

This chart shows the major long-term breakout in yields that took place in US 10-Year Yields on Mar 22nd as TNX spiked above its 2000 secular downtrend line.  This breakout indicated a multi-decade positive change in the direction of these yields.

Are Yields Close To A Peak?

The upper panel of Chart 3 below plots the CBOE 10-Year Note Index (TNX) weekly since 2012 in the upper panel, with a corresponding chart of the 63-day Relative Strength Index (RSI) in the lower panel.  We use the 63-ay RSI as an indication of Strategic overbought and oversold conditions.

Chart 3

The red highlights in the lower panel show that TNX is currently hovering at quarterly overbought extremes and that the previous 4 instances of this either coincided with or closely led to what have been the most important peaks in benchmark long-term US interest rates over the past decade.

Editor’s Note: This is not a Tactical timing tool indicative of a peak in long-term US interest rates, but rather just a Strategic indication that there may be an emerging peak over the next one to several months.

Some Historical Perspective

Chart 4 below plots the yield of the 10-Year Treasury Note monthly since 1900.  It shows that, even though these yields are extremely high within the context of the past decade, they are still more than 1.00% below their 122-year monthly average of 4.52%.

Chart 4

Moreover, should these yields exceed the 3.75% to 4.01% area as shown in Charts 1 and 2 above, we will be watching the 4.52% area as another potential infleciton point, if not directional reversal point, for these benchmark US interest rates.

US Interest Rates’ Effect On US Stocks

We all know that rising interest rates have an adverse effect on equity prices.  Statistically, however, our data shows that over the past 10 years the inverse linear correlation between the S&P 500 (SPX) and TNX has not been statistically significant.  The expected inverse correlation becomes more significant and stable between 10 and 40 years years ago, which may be attributable to what has essentially been a zero interest rate policy in the US for about the past decade until just recently.

Therefore, considering these data, managers/investors are advised to carefully consider any stock market-related assumptions they may make based on expected interest rate direction.