US 10-Year Yields Vulnerable To A Significant Countertrend Decline

Conclusion, Investment Implications, Strategy

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 appreciable broken, if at all, without at least a significant corrective move back below 3.00% first.  However, although our Strategic (quarterly) outlook is for benchmark long-term US interest rates to correct lower from here, our work does not yet indicate a Tactical (monthly) buying opportunity in long term Treasury prices proxies like the CBOE Treasury Yield 10 Year Note Index (TNX).  When such an opportunity become apparent, we will notify subscribers via an Asbury Alert.

Introduction

In our March 15nd Special Report entitled “US 10-Year Yields Target A Rise To At Least 2.25%”, we said:

“The yield of the benchmark US 10-Year Treasury Note’s recent successful test of underlying yield support at 1.70% sets the stage for a rise to at least the 2.25% to 2.32% area, (which has been) our initial upside target since early January and a likely place for the current rise in these yields to at least temporarily stall.  Should these yields exceed 2.32%, however, it would set the stage for a much larger move to the 3.00% to 3.35% area.“

Our Projected Test Of 3.00% Is Taking Place Now

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 red highlights show that, as anticipated in our Mar 15th report, the 3.00% to 3.35% area is currently being tested as these yields have traded as high as 3.042% thus far this morning.  Major levels like this one are seldom appreciably penetrated, if at all, without at least some countertrend corrective action first.

10-Year Yields Have Become Strategically Overbought

The upper panel of Chart 2 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.  TNX is based on 10 times the yield-to-maturity on the most recently auctioned 10-year Treasury note.  We use the 63-ay RSI as an indication of Strategic overbought and oversold conditions.

Chart 2

The red highlights in the lower panel show that TNX has reached quarterly overbought conditions as of Apr 11th, and that the past several instances of this either coincided with or closely led the most important peaks in benchmark long-term US interest rates over the past decade.

Bond Prices: Investors At Least Bullish Extremes

The blue line in the lower panel of Chart 3 below plots a daily survey of futures trader bullishness on CBOT 30-Year T-Bond futures since 2012.  A corresponding chart of the T-Bond futures contract appears in the upper panel.  As we know, Treasury bond prices move inversely to long-term Treasury yields as shown in Chart 1 above.

Chart 3

The green highlights show that this survey is coming off of a decade-long least bullish extreme of just 14% bullish and that, as a contrary indicator, previous instances of this have closely coincided with most of the important bottoms in long-dated Treasury prices since 2012.  This metric suggests an emerging opportunity to buy long-dated Treasuries, which can be accomplished by buying either 30- or 10-Year Treasury futures or ETFs like the iShares 20+ Year Treasury Bond ETF (TLT).

However, we are still waiting for a Tactical signal that indicates this setup, as indicated by today’s charts and data, has turned into a trading opportunity.  As of right now, we do not have that yet.

US Interest Rates’ Effect On US Stocks

It is generally accepted that rising interest rates have an adverse effect on equity prices and, generally, this is true.  Statistically, however, our data shows that over the past 10 years the inverse linear correlation between the S&P 500 (SPX) and TNX has been spotty at best.  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.