Conclusion, Investment Implications, Strategy
The yield of the benchmark US 10-Year Treasury Note is currently reversing lower from a mid-February test of the 2.05% area, a level that we identified months ago as an important inflection point for benchmark long term US interest rates. The current pullback in these yields is amid favorable conditions to continue on a near term, week-to-week basis. However, as long as critical yield support at 1.70% to 1.55% contains them on the downside, their December 2020 major advance will remain intact as will our initial upside target of 2.25%
Introduction
After more than a decade of a very stimulative Federal Reserve and near-zero US interest rates, Federal Reserve Chairman Jerome Powell told a House panel today that he is leaning toward a quarter-point increase in March to combat inflation that has been stronger and longer than expected. Meanwhile, expectations of an upcoming cycle of rate hikes have already taken the yield of the benchmark 10-Year Treasury Note from 1.35% on Dec 3rd to as high as 2.05% on Feb 15th. Today’s report displays and discusses the technical aspects of this recent reversal in the direction of interest rates, identifies where the key levels are, and indicates what our expectations are for later this year.
10-Year Yields Reverse From Important 2.00% 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 green arrow points out that these yields rose above their 52-week MA in December 2020 to indicate a major trend change toward rising long term US interest rates, and that this trend was subsequently tested and held on Jly 30th and Dec 10th.
Chart 1
Most recently, the red highlights show that these yields rose to test formidable overhead yield resistance at 1.94% to 2.05% in mid February and have since reversed lower from it — which would be expected for the first test of an important level like this.
Formidable yield support exists below the market at 1.70% to 1.55% and represents the April 2013 and January 15th benchmark lows and the 52-week MA. This is where the Dec 2020 52-week uptrend in these yields should resume if still valid.
The Major Trend In Yields Remains Up: Watch The 1.64% Area
Chart 2 below plots the CBOE Treasury Yield 10 Year Note Index (TNX) daily, which tracks the benchmark US 10-Year Note. It is based on 10 times the yield-to-maturity on the most recently auctioned 10-year Treasury note. The blue highlights show that these yields broke out higher from about 9 months of sideways indecision on Jan 5th.
Chart 2
This breakout indicates that its previous August 2020 rise has resumed and targets a rise to 22.50 (which equates to a 2.25% yield) that will remain valid as long as the upper boundary of the indecision area at 16.40 (roughly a 1.64% yield) loosely contains as underlying support. Note that 1.64% is right in the middle of the 1.70% to 1.55% yield support area that we identified in Chart 1 above. US 10-Year yields are currently trading at 1.84%.
The Near Term Bias
The upper panel of Chart 3 below plots the iShares 20+ Year Treasury Bond ETF (TLT, which tracks 10-Year Treasury Note prices) daily since October 2021, with a corresponding chart of TLT’s On Balance Volume (OBV) and its 21-day (our Tactical time period) moving average in the lower panel. Volume indicates investor urgency.
Chart 3
The green highlights show that OBV rose above its 21-day MA on Feb 17th to indicate a new monthly trend of rising urgency to buy TLT (which moves inversely to yields). That trend change in volume marked the bottom in the price of TLT. As long as it continues, long-dated USA Treasury prices should continue to rise as yields continue to decline into the 1.70% to 1.55% support window we identified above.
When the trend of expanding volume in TLT ends, however, it will suggest that the current minor trend of declining yields has ended and the larger move that targets a rise to at least 2.25% has resumed.