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10-Year US Treasury Yield Nearing a Structural Inflection Point?

Fed Governor Lael Brainard spooked investors with her comments regarding the Fed’s shrinking of the balance sheet at a faster and more aggressive pace. Stocks sold off sharply into the close today, with popular stock indexes falling across the board. Dow Jones Industrial Average (INDU) ended the day down 280.70 or -0.80%. S&P 500 Index (SPX) fell 57.52 or -1.26% and the Nasdaq Composite Index (COMPQ) declined 328.39 or 2.26%. Interest rates also suffered sharp setbacks across all maturities. The 30-year yield (TYX) jumped 110 bp to 2.584%, and the 10-year yield soared 144 bp to 2.556%.


Interest rates are approaching critical levels corresponding to the top of the structural downtrend channels from 1980.

Historically, the long-term trends in the fixed income markets develop because of two dominant forces – long-term changes in the economy (i.e., recession, inflation, stagflation, disinflation, deflation, etc.) and structural changes in investment psychology (risk aversion to risk-taking and vice versa).

A structural trend breakout or breakdown also does not occur overnight. It requires considerable time and effort. For instance, a 9-year complex head and shoulders in TNX developed from 1973 to 1992 before the structural downtrend in yield began. The breakdown below neckline support at 6.8-7.0% signal a long-term downtrend in interest rates.


A similar situation may be developing today. The 41-year secular/structural downtrend is approaching an inflection point as TNX nears the top of the downtrend channel at 2.81-3.20%. Also, a 10-plus year head and shoulders bottom pattern has developed. Neckline resistance is 3.036-3.248%, coinciding with the Dec 2013 and Oct 2018 highs. A breakout above the neckline and the top of the structural downtrend channel confirms a structural breakout. Since the height of the base is 285 basis-point, a confirmed break out warns at a TNX target of 6.10%, longer-term.


However, the 2-year rally from 0.398% (Mar 2020) will likely fade near 3.0-3.25% as an overbought condition prompts another consolidation. The MACD price momentum trend is nearing the top of its long-term trend, suggesting an impending critical test. The RSI overbought/oversold indicator is also approaching overbought levels (70%-plus).


Although a breakout is technically significant, failure to convincingly breakout above 3.0-3.25% may also signal the start of an intermediate-term pullback that may sustain for many months or years. Since it took 8-years to develop the left shoulders from the head (Mar 2020 low), to create symmetry in the pattern, it may require another 6-years to develop the right shoulder(s). Will a pullback to 1.25-1.75% solidify another right shoulder, setting the stage for a neckline breakout above 3.0-3.25%?


Over the past 40-plus years, it is uncanny that TNX peaks every 4-5 years, as represented by the black vertical dash line on the monthly TNX chart. TNX last peaked in Oct 2018 at 3.248%, or 43-months ago. If the previous trend repeats, TNX will peak toward the end of the year or next year.


Widespread concerns about rising inflationary pressures leading to higher interest rates continue to spread. However, the monthly chart of TNX shows that soaring yields may soon peak near formidable structural resistance at 3.0-3.25%. Does the failure of TNX to breakout above the neckline set into motion a multi-year trading range between 1.25% and 3.25%? Does this scenario seem plausible if the US economy or the global economy slips into a recession next year?


Source: Chart courtesy of StockCharts.com

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