Bond Yields Showing Some Vulnerability
- A look at the primary and secular trends
- Interesting momentum study points to lower bond yields
- Bond Net New Highs set to pounce in either direction
- Slight softening in confidence hints at lower yields
In the June and July editions of my Market Roundup webinars I pointed out the possibility that bond yields were likely to experience some extended ranging action or an actual decline. Since then, they have gone nowhere as the range bound scenario has played out. Nevertheless, the latest data suggests that a softer trend may be in store, as several charts are close to breakdown points. I should add that my remarks were, and continue to be addressed to longer dated maturities. That’s because yields on shorter-term ones seem intent on marching higher. Let’s first take a look at the long-term technical picture and work our way down to nearer-term trends.
A look at the primary and secular trends
Chart 1 shows that the 10-year yield has been wiggling around for the last couple of months at a position just under its secular or very long-term down trend line. At this point there is little doubt about bullish primary trend. Evidence comes from the fact that the yield is above its 12-month MA and the long-term KST is still rising. There is no doubt though, that this momentum indicator is very overstretched. Bull markets do not end because momentum is overbought. They end because the trend reverses. I am thinking that the secular trend reversed in 2012, and that what we are experiencing now is a normal reversal process, one that has played out consistently since record began in the mid- nineteenth century. That process is a giant multi-year trading range. If so, any drop in yields should be viewed as an extension of the ranging action that has developed in the last decade. By implication, that would mean the 2012 and 2016 lows remain intact.

Chart 1
Chart 2 shows a similar period, but this time featuring the 3-year yield. This maturity has already completed and broken out from an eight-year inverse head and shoulders formation and is itself facing resistance in the form of its secular downtrend line. It seems to me, that the completion of that large base already qualifies it as a secular reversal. Note that the yield itself recently touched a new bull market high, unlike the 10-year series. In other words, it is acting more akin to a money market yield than longer-dated credit instruments.

Chart 2
Chart 3 logs the long-term action of the 20-year treasury. The red and green arrows flag instances when the 52-week ROC peaks from a position at or beyond the overstretched green and red horizontal lines. All together there were 17 signals, only one of which, in 2017, was false. An eighteenth was recently triggered on the sell side. If my expectation of an extended trading range comes to pass, that last momentum sell indication should translate to a drop in yields over the near-term. As I mentioned before, the bond market has reached a crucial make or break point in that regard.

Chart 3
Interesting momentum study points to lower bond yields
First, Chart 4 tells us that the 30-year yield may be in the process of completing a very large base, the top of which is flagged by the horizontal green trend line. However, the late spring saw a breakout attempt fail. Now the yield is back to the line joining the head to the potential right shoulder low. Note also that the 65-week EMA is right underneath the trend line, which is why you can’t see it. The convergence of these two major potential support entities means that there is a good chance that the yield can hold. However, if it does not, and succeeds in decisively violating that 29.50% level (basis Friday close), the indication would be for lower yields. A violation of that support would also confirm the upside breakout as a whipsaw, an event that would add fuel to the bearish case. The two negative KSTs in the bottom windows suggest that a downside break stands a better than 50/50 chance of happening.

Chart 4
Bond Net New Highs set to pounce in either direction
Charts 5 and 6 adds to the bearish arguments for yields (bullish for prices). The upper window of Chart 5 indicates that the Barclays 20-year Trust is, like the 30-year yield, caught between two critical trend lines. At around Thursday’s close, the price was literally right at the upper green one. The indicator in the lower window is my Net New High Bond indicator. It’s something you can follow, either by clicking on the chart, or plotting !PRNNHBND. Right now, it is at a neutral reading, just slightly above zero. If it can rally above the 0.7 level that would suggest that the recent trading range will be resolved on the upside. Conversely, a drop much below -0.7 would suggest otherwise.

Chart 5
Slight softening in confidence hints at lower yields
Chart 6 compares the ratio between the Fidelity Growth and Income and Vanguard Treasury funds to that of the 10-year yield. The former predominantly comprises high yield bonds and the latter, high quality government paper. The ratio is really a reflection of confidence or lack thereof amongst investors. When confidence is rising that tends to be bullish for yields and vice versa. The ratio is not an exact mirror image of the 10-year series, but most of the time the two series move reasonably closely together. Recently, the ratio dropped below its 2016-18 up trend line, which suggests that confidence may have begun to dissipate somewhat. However, before we can make that conclusion we need to see a decisive drop below the 200-day MA, say to the 0.83 level. If that happens, it would suggest that the 10-year yield itself stood a better than even chance of violating its red support trend line and 200-day MA.

Chart 6
Looking at Chart 7, which shows the yield in greater detail, that would appear to be a daily close, say below 20.6%.

Chart 7
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.