A TEN-YEAR TREASURY YIELD MOVE ABOVE 2.62% WOULD PAVE THE WAY FOR 3% YIELD LATER THIS YEAR -- THAT WOULD PUT THE THIRTY-FIVE YEAR DECLINE IN BOND YIELDS IN JEOPARDY -- GERMAN YIELD NEARS TWO-YEAR HIGH ON HAWKISH ECB HINT
A LONGER TERM LOOK AT RISING BOND YIELDS... Chart evidence of a major upturn in Treasury bond yields continues to grow. The weekly bars in Chart 1 show the 10-Year Treasury yield ($TNX) nearing a test of its late 2016 intra-day peak at 2.62%. A decisive move above that chart barrier (which appears likely) would put the TNX on a path to a much more important resistance barrier near 3% which was the peak formed at the start of 2014. And that's when things really get interesting from a longer-term perspective. Chart 2 show a major downtrend line drawn over the 2000/2007 peaks for the TNX sitting right at 3%. That makes the 3% level extremely important. Because any close above that level would end the major downtrend in yields (and uptrend in bond prices) that helped start the deflationary trend in financial markets that began at the turn of the new century. It gets even better. Chart 3 shows that a decisive move over 3% would also end the three decade long downtrend in the 10-Year Treasury yield that started in 1981 near 15%. [Chart 3 uses a logarithmic scale which is more suitable for longer-term trendline analysis]. There's a lot of discussion about how high the Treasury yield would have to climb to start having a negative impact on the stock market. The recent climb is already hurting certain bond proxies like utilities and REITS. I suspect, however, that it would probably take a decisive move over 3% to really start getting stock investors worried. And I wouldn't be surprised if it got there before the end of this year.
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Chart 1
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Chart 2
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Chart 3
TEN-YEAR GERMAN BUND YIELD NEARS TWO-YEAR HIGH... One of the major forces pushing Treasury yields higher is the corresponding upturn in foreign yields. Ultra-loose monetary policies by foreign central banks have held foreign G10 bond yields lower which has weighed on Treasury yields. And those yields are starting to climb. Japanese yields (although extremely low) climbed to the highest level in six-months this week when the BOJ cut back on longer-dated bond purchases. Canadian yields are climbing faster than in the U.S. on expectations for a possible rate hike later this month. The German 10-Year yield is also climbing faster than in the U.S. The 10-Year German bund yield has climbed 30 basis points over the last month which is nearly double the 17 basis point climb in the U.S. Chart 4 shows the 10-Year German yield jumping another 4 basis points today to 0.58 which is a few basis points away from a new two-year high. The jump in eurozone yields is being attributed to release of minutes of the December ECB meeting which mentions the possibility of a shift in monetary guidance in early 2018, which is being interpreted as possibly signalling a hawkish turn. That's also pushing the euro closer to an upside breakout.
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Chart 4
EURO NEARS THREE-YEAR HIGH ... Any hint of a tighter monetary policy by the ECB (which started cutting its bond purchases in half this month) would put upward pressure on eurozone bond yields and its common currency. The weekly bars in Chart 5 show the euro trading just shy of a new three-year high. An upside breakout would also put the common currency above long-term resistance around the 1.20 level. An upside breakout in the euro would have several intermarket implications. For one thing, a rising euro is bearish for the U.S. dollar. That's because the euro carries the biggest weight (57%) in the Dollar Index. [The yen which has the second biggest USD weighting (14%) jumped against the dollar this week, while all G10 currencies are bouncing against the dollar today]. A weaker dollar would lend more support to commodity prices like gold which have been rising recently. WTIC crude has reached a three-year high, while Brent crude today reached $70 for the first time since December 2014. Rising commodity prices are inflationary which usually pushes global bond yields higher. And that in turn supports the case for higher Treasury yields. While inflation may become a problem for stocks later in the year, the current rise in bond yields is probably more reflective of a stronger global economy which is supportive to rising stocks, especially those tied to stronger economic growth and the reflation trade.
