Is The Global Bull Market In Interest Rates Resuming?

• The global picture
• Short-term rates
• Longer-term rates
• International rates

The Global Picture

When I talk about interest rates I am referring to a general advance that takes place at both ends of the yield spectrum. I make this reference because in many situations certain maturities and credit qualities do not necessarily move in concert. That can be helpful because there are times when specific segments of the credit markets lead others, so from a forecasting point of view, clues are provided by these forward-looking indicators.

For the last 6-months of 2016, interest rates around the world rose to the degree that many long-term MA’s were crossed. Pretty well all long-term smoothed momentum indicators, such as the KST, or the Coppock Indicator, reversed to the upside. All of that indicated that a bull market in rates had begun. Since the turn of the year though, most series have been caught in a trading range, but in the last few days, several maturities have registered new bull market highs. That suggests that other maturities may soon follow suit.

Chart 1 sets the scene for the world as it features my World Bond Index (!PRWBI). This one is calculated by combining the price of the Spider Barclays International Treasury Bond ETF (BWX), effectively the global bond market ex the US, with the price of the Barclays US Aggregate Bond ETF (AGG). They are both weighted by their approximate share of global GDP. Last year’s price decline (rise in yield) is apparent. So too, is the recent trading range. The red line marks the lower portion of what could turn out to be an eight-year top. Remember we do not have the aggregate data prior to this period, but we do know that there were secular bull markets for all major countries. This means that 2009-2017 trading range is one that follows a secular bull market in bond prices (bear market for yields). It is apparent that global bond markets have reached a crucial juncture point. Do they complete the top and signal a reversal in the secular trend? Do they bounce from this support, thereby extending the trading range? Looking at the bearish long-term KST and the rolling over action of the short-term series, I believe the odds must favor lower prices and higher yields. Let’s take a closer look.

Chart 1

Short-term rates

Chart 2 for instance, displays the 6-month treasury yield ($UST6M), together with its short-term KST. It has been on a persistent upward zig-zag since late 2015 and spent most of 2016 in a trading range from which it broke to the upside late last year. In recent days the yield has also broken above the dashed green resistance trendline, as it registered a new bull market high. The KST gas also gone bullish, which suggests more upside potential.

Chart 2

We see similar strength in the London 3-month Interbank rate($LIBOR3) in Chart 3. The major difference is that the short-term KST has not quite managed to join its long-term counterpart in the bullish camp.

Chart 3

Extending the maturity to 2-years ($UST2Y) also shows the yield breaking to the upside. This time from a giant reverse head and shoulders. Note also that the long-term KST has reversed to the upside.

Chart 4

Chart 5 shows the near-term picture on the 2-Year ($UST2Y) with a recent breakout from a broadening formation with a flat top. This is a pattern that is often followed by an above average price move, so since it’s backed by a rising KST we could possibly see some fireworks in the period ahead.

Chart 5

Longer-term maturities

The 10-year series is the most closely watched, and Chart 6 shows that the yield ($TNX) is just below resistance in the form of the two converging trendlines. If it can follow the lead of the shorter maturities, the next level of resistance would be at the 2013-14 highs around the magic 3%. It’s going to be a struggle because the ROC is at an extended level. The red arrows show that, during the secular bear, reversals from at or above the +40% level have proven treacherous for yields (great for prices). At the moment that indicator is still rising, so we do not have a yield signal.

Chart 6

Chart 7 tells us that the yield has just started to break out from its recent trading range and the KST has started to turn up. Note also the close connection between the yield and the Dollar Index in the form of the ETF (UUP). These joint breakouts argue for a higher dollar and for higher bond yields. That scenario would be invalidated in the event that the two red up trendlines are violated.

Chart 7

International rates

Charts 8,9 and 10 take a closer look at the 10-year yields for Germany, Japan and the UK. Chart 8 shows that the German 10-year has violated 6-year down trendline as well as its 65-week EMA and 40-week SMA, all of which should provide support going forward. Unfortunately, due to the nature of the calculation and the fact that yields were recently negative, we cannot calculate a KST. However, we can see that the MACD has rolled over slightly, which means that the recent low at .19% becomes a critical one. On the other hand, a decisive move above the previous high, say to .5%, would complete a reverse head and shoulders, so that’s something to watch out for on the upside.

Chart 8

Japan, in Chart 9, experienced a similar rally to that seen in the US, but despite a positive MACD has so far failed to break its 2011-17 down trendline. Consequently we cannot yet come to the conclusion that the Japanese secular interest rate decline is over.

Chart 9

Finally, Chart 10 features the UK 10-year yield. The US yield rally is reflected in the chart, but this time, the correction has not been sideways, but more of a downward one. Were the yield now to take advantage of a moderately oversold daily KST and break above the two converging trendlines at 1.5%, it will have completed a 3 ½-year reverse head and shoulders as well as the two-year one that has been labeled.

Chart 10

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.