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Structural Breakout in the 10-year Treasury Yield?

Fed is normalizing rates, the Russia-Ukraine war continues, inflation continues to soar, and investors are fearful about a Fed policy mistake. Rates have risen despite the above uncertainties. The 10-year Treasury yield (TNX) has soared from a historic low of 0.398% (3/9/20) to a recent high of 2.503% (3/25/22).


Is this the start of a structural trend reversal in US interest rates?


Forces that may support higher interest rates:


(1) Inflationary pressure will continue, supporting higher yields.


(2) Ongoing tariffs from China can lead to higher inflation.


(3) The Fed normalization of interest rates can push Treasury prices lower and interest rates higher.


(4) The massive fiscal stimulus packages can lead to historic record federal debt, putting pressure on higher rates.


(5) Russia/Ukraine war can persist for far longer than expected, exacerbating inflation pressures, near-to-intermediate-term.


Forces that may support lower interest rates:


(1) Structural/secular downtrend remains intact despite the dramatic rise in yields over the past two years.

(2) Secular trends in automation, technology, innovation, and globalization are structural deflationary developments that suggest lower interest rates, longer-term.


(3) Geopolitical tensions (i.e., Russia/Ukraine), economic concerns (i.e., economic contraction or recession), and a risk-off environment can lead to investors gravitating to Treasuries as safe-haven assets.

Most of the US maturities are approaching their structural/secular down trendlines. Global interest rates are also nearing key resistances, suggesting impending inflection points worldwide.


The market tends to discount the future. If the Fed conveys to the public that it will raise interest rates in the future, investors and traders will have already adjusted their tactical and strategic strategies to accommodate for higher rates. Interestingly, the widely-expected rate hike occurs when yields are approaching multi-decade resistances.


Structural trend reversals require considerable time and effort (technical base) before a breakout or breakdown. A 19-year head and shoulders between 1973 and 1992 led to a secular TNX breakdown. Below the neckline support at 6.8-6.98% (1991) ignited a multi-decade structural downtrend in interest rates.


A similar situation may be developing today. A 41-year secular/structural downtrend is nearing an inflection. Also, a technical base as represented by a 10-plus year head and shoulders bottom pattern warns of a potential breakout.


Long-term resistance also converges near the top of the 1981 structural downtrend channel at 2.81-3.20%. A breakout above the neckline and the top of the structural downtrend channel at 3.036-3.248% (2013 and 2018 highs) confirms a breakout. The height of the base is 285 basis-point. A breakout renders a TNX target at 6.10%, longer-term.


However, an overbought condition has developed as the MACD and RSI indicators near crucial resistances. Although a breakout is technically significant, failure to convincingly breakout above 2.81-3.248% may also signal a near-to-intermediate-term pullback in TNX.


A brief review of TNX over the past 40-plus years suggests TNX tends to peak every 4-5 years (see the black vertical dash line). TNX last peaked in Oct 2018 at 3.248%, or 43-months ago.


If the previous trend repeats, TNX can peak later in the year or next year. Will the pullback in TNX toward 1.25-1.75% create another right shoulder and set the stage for a head and shoulders bottom breakout?


Source: Chart courtesy of StockCharts.com

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