The Idea of Rising Bond Yields May be Getting Too Popular
The longer-term indicators have been bullish on bond yields (bearish on prices) for a while now. However, they are now being joined by a number of commentators offering a similar view, which makes me uncomfortable. Don't get me wrong, the indicators are still pointing to a primary yield bull market -- it's just that rates may have backed up a bit too much for the time being.
When I say that yields have backed up, I am referring to longer-dated paper. Chart 1, for instance, shows that the 30-year yield has been rallying sharply, whereas the 2-year maturity, which is far more sensitive to Fed developments, has been rangebound. As long as the Fed keeps rates in the basement, I don't see the spread between long and short maturities diverging that much more. That's also one reason why it seems unlikely that bond yields will rally much more from current levels.
That ratio between the 2- and 10-year notes is really stretched right now, as you can see from Chart 2. That's actually bullish for stocks, as it means bond investors are looking forward to what they see as a positive economy down the road. Note that there were five steepening peaks in the last couple of decades. The green arrows above the S&P Composite show that all instances were followed by a lengthy stock market advance. At this point, the curve continues to steepen (move higher), so the clock has not even begun to tick for the insertion of another vertical line and green arrow.
Longer-Term Perspective
Chart 3 shows the long-term picture for the 20-year yield, with the tail end of the secular bull market for yields and the evolution of the 40-year secular bear starting in 1981. The pink-shaded area underscores the fact that most secular turning points for bonds are characterized with a trading range. Indeed, it took 10 years after the final 1981 peak in rates to complete the trading range. Fast forward to 2021 and it's possible that another trading range is being formed with a low point in 2020.
It's important to remember that no two secular reversals are exactly the same. However, if the current situation takes on the rangebound characteristics similar to previous ones, it's quite possible that yields experience several years of wild swings under the context of a giant trading range. Right now, the primary trend is up, as the KST is positive and the yield itself is trading above its 24-month MA.
There is another reason for being long-term bullish on rates. That arises because the 52-week ROC has reached a record level, which underscores a very strong and vibrant bull trend. Record momentum readings coming off a major low are a very positive sign for any market, as it reflects a major reversal in psychology. Now it's certainly possible to argue that this achievement is only possible because interest rates are at record lows and, therefore, a small basis point advance immediately triggers a giant momentum reading. However, don't ultra-low rates themselves (and the liquidity required to bring them about) have a hugely important stimulative effect on the economy? In short, the record 52-week ROC reading could be a market sign that the long-term trend of bond yields is stronger than most expect.
Intermediate Trend Considerations
Chart 5 shows that the iShares 20+Year Treasury ETF (TLT) has dropped back to the lows set in 2019. There are no guarantees, of course, but that could represent solid support for a while as some right shoulder or other distributional activity takes place. Already, the short-term KST has gone bullish.
Chart 6 offers a more solid argument for a rally, as the TLT has recently experienced a selling climax. Selling climaxes develop when the PVO (Price/Volume oscillator) exceeds the horizontal blue overbought line and starts to reverse. This needs to be confirmed by the KST, in the center window, simultaneously reversing to the upside from an oversold reading. There are five previous examples of a selling climax in the 10 years of history covered by the chart. Each was followed by a rally or extended trading range.
To summarize, there are good reasons for suspecting that yields at the long end are in a primary bull market. However, a recent selling climax suggests that things may be overdone for the time being.
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 Groupof Walnut Creek or its affiliates.
