Interest Rates Are Breaking Down On A Worldwide Basis

• Current Trend of Declining Rates Seen as Part of a Large Base
• Downside Breakouts in Yields are Worldwide in Scope
• US Short-Rates Look Vulnerable as Well
• 30-Year Yield Completes a Top
• Stocks and Commodities versus Bonds

Current Trend of Declining Rates Seen as Part of a Large Base

This week has seen many interest rate series, both in the US and around the world, breaking down from important trading ranges or reaffirming previous breaks. It seems that the bond market is responding to the recent trend of lower commodity prices. In retrospect, that rangebound action, along with any further drop in yields in the period ahead, is likely to turn out to be part of a larger trading range, the upside resolution of which will ultimately signal the next secular uptrend. In short, I am expecting any downside action to be of limited scope and not to register new secular lows.

This possibility is captured by the 3-year yield, featured in Chart 1 below. Here, we can see the secular downtrend that took place between 1981 and 2012. Note that, last year, the yield once again found resistance at its secular downtrend line. Downside reversals in the KST have historically been followed by a primary trend decline; last year’s signal was no exception. In the case of the 3-year maturity, it looks as though the yield completed and broke out from a base pattern in late 2016. That means that any decline in its yield from here on out is likely to represent a retracement to the top of the 2010-2017 pattern.

Chart 1

Chart 2 moves further down the yield curve to more realistically feature an unresolved trading range, which has been highlighted in blue. Note that the KST is still declining and still at a moderately overbought reading. As this momentum indicator works its way lower, I am expecting rates to do the same. When an upside KST reversal does materialize, it is likely to signal another assault on the secular downtrend line for both this and the 3-year maturity in Chart 1.

Chart 2

Downside Breakouts in Yields are Worldwide in Scope

Chart 3 compares the US 10-year yield to those of similar maturity in the UK, Germany and Japan. All four series broke key support trend lines at some point in 2019. This widespread agreement suggests that a test of the 2016 lows is in the cards. In the case of Germany, we are literally there.

Chart 3

US Short-Rates Look Vulnerable as Well

The 3-month LIBOR, shown in Chart 4, has been falling gently for several months and is now right at its 12-month MA.

Chart 4

It seems likely that it soon will experience a negative crossover, as the 1-year Treasury (Chart 5) has already done so. This crossover, unlike the 2015 whipsaw, is being supported by a declining long-term KST.

Chart 5

30-Year Yield Completes a Top

Chart 6 shows that the 30-year yield has completed its 2016-2019 top this week. As indicated by the numbers, this has been a three-part breakdown. First, we saw a false break to the upside. Second, confirmation came in the form of a violation of the dashed red uptrend line and the 200-day MA. Finally, Wednesday saw the yield complete a head-and-shoulders top. Since all three KSTs are currently in a bearish mode, it seems likely that some form of test of the 2016 low is in order.

Chart 6

Stocks and Commodities versus Bonds

Two areas worth monitoring are the ratio between stocks and bonds and the ratio between commodities and bonds. Both are perched on the edge in terms of key long-term trend lines. Should these be violated, the odds of a more severe drop in yields themselves would increase substantially, as it would imply a weakening economy.

Chart 7 shows that the Stock/Bond relationship is resting on the neckline of a small potential 1919 head and shoulders. More significant is the fact that the Special K, which you can read about here, is resting on a much larger trend line at a time when the short-term KST is in a bearish mode.

Chart 7

Chart 8 compares commodities to bonds. This relationship is also resting on a trend line, but here it's over 3 years in scope. The Special K has already violated its line, but, since it has been touched or approached on only two occasions, it is less significant than that for the ratio. This relationship could even be about to reverse, as its KST has started to tick up. If so, a joint break above the two green downtrend lines would indicate that the test of the 2016-2019 red support trend line for the ratio had been successful. Don't forget, you can update these charts simply by clicking on them.

Chart 8

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.