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Interest Rates Volatility


Financial markets reacted violently soon after the Fed raised another 75 basis points to the target rate and stressed the need for higher interest rates this year. The hawkish comments resulted in stocks plummeting, the US Dollar rallying, and shorter-term interest rates ticked higher while longer-term yields fell in a volatile hour of trading.

Do the Fed actions today lead to interest rates rising over the near term to medium term but interest rates falling over the long term as higher rates lead to slower economic growth?

Although investors widely expected the Fed to raise the federal funds rate by 0.75 percentage points, investors were surprised by the Fed's new interest rate projections, showing median official rates to rise to around 4.4% by the end of the year from the 3.4% forecast in June.

Stubbornly high inflation rates and higher interest rates continue to be the primary drivers for the financial markets. Yields may have fallen during the summer, coinciding with a stock market countertrend rally. However, worries have returned as Fed officials warn of containing inflation at the expense of economic growth.

Bond yields are trading at their highest levels in more than a decade, posing a challenge for stocks and the economy. The Fed news today of raising interest rates until it can rein in inflation at the expense of the economy has eroded any hope for a Fed pivot.

How high will interest rates go before the end of the Fed rate-hike process? And how long will rates stay high before stabilizing?

Technically speaking, the longer-term maturities such as the 30-year US treasury Yield (TYX) and 10-year US treasury yield (TNX) generated negative outside days by the end of the day after experiencing major breakouts in recent weeks. It was not the case for the shorter-term maturities, including the 2-year US Treasury Yield and the 3-month US Treasury Yield (IRX).

Is today's divergence between the long and short end of the maturities suggesting the fixed income market is discounting a near-term pullback in interest rates but expecting higher rates over the intermediate-to-longer term?

The 30-year US Treasury Yield (TYX) breakout above 3.472% on 9/12/22 suggests +0.617 or a target at 4.089%. Although higher rates are possible, intermediate-term, a negative outside day on 9/21/22 hints at a near-term consolidation toward 3.17-3.209% (Dec 2021 uptrend and the 50-day ma) near-term. Intermediate-term support is also available at 2.732-2.925% (May/Aug 2022 lows and the 200-day ma).

The 10-year US Treasury Yield (TNX) breakout above 3.483% on 9/20/22 suggests +0.958 or a projection of 4.441%. However, a negative outside day on 9/21/22 signals a near-term consolidation toward 2.9-3.024% (Dec 2021 uptrend and the 50-day ma). Intermediate-term support remains at 2.513-2.525% (Aug 2022 low and 200-day ma).

The 5-year US Treasury Yield (FVX) breakout above 3.596% on 9/14/22 suggests +1.012 or a target at 4.608%, intermediate-term. A negative outside day on 9/21/22 warns of a near-term consolidation to 3.152-3.212% (Dec 2021 uptrend, Aug 2022 breakout, and the 50-day ma). Intermediate-term support remains at 2.494-2.584% (Apr/Aug 2022 lows and the 200-day ma).

The 3-month US Treasury Yield (IRX) is the shortest of the US maturities and a proxy for Fed Funds rates and the central bank's monetary policies. A breakout above 2.418% in mid-Jul 2022 suggests +2.653 or a projection of 5.071% to retest the Mar 2007 high of 5.045%. An overbought condition warns of a near-term consolidation toward 2.644% (50-day ma), and below this 2.418% (Jul 2022 breakout), and 1.141% (200-day ma).


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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