Yields Breaking or About to Break Out All Over
I had thought that rates would moderate a little at the beginning of 2022, as the economic growth rate slowed due to COVID and other factors. Not so, as yields across the spectrum have resumed their bull market rally in anticipation of higher inflation and a less accommodative central bank. Even the long end is beginning to come to life.
Mr. Market is Leading the Fed
Chart 1 shows the dichotomy between the rest of the market and Fed-influenced money market rates. The top window features the 2-year Treasury yield, while the lower one features the Effective Federal Funds rate, which is controlled by the Fed. The green and red arrows mainly slant to the right, indicating that market forces typically move ahead of the Fed. I always think of the Central Bank being a lagging indicator, just like the rest of the government. Anyone old enough to remember Gerald Ford's "Win Inflation Now" buttons, right at the 1974 inflation peak, will know what I mean. Anyway, back to the chart, where we can see the yield on the 2-year note heading sharply north, well ahead of the Funds rate.
The 5-Year Yield
The 5-year maturity is also joining the higher yield party. This series recently broke out from a giant downward sloping inverse head-and-shoulders and touched a new recovery high this week. Note that both the intermediate- and long-term KSTs are in a positive mode, indicating that there is probably more to come.
10-Years and Above
The 10-year series looks as if it is set to mimic the 5-year action, as it has just tentatively broken out from an inverse head-and-shoulders pattern of its own. The chart does show a tentative breakout. However, it's important to note that this is a weekly chart and needs a Friday, as opposed to Tuesday, close to make the break official. It seems likely that that will happen as all three KSTs are in a rising mode.
Peaks and troughs in the 39-week ROC for the 20-year yield have often indicated important trend reversals in the yield itself. Previous ones that have taken place from at or beyond the overbought and oversold lines have been flagged by the arrows using the benefit of hindsight.
It's possible that this series has just bounced off another oversold reading, although the reversal is not yet definitive, to be sure. One reason why that is likely to be the case comes from the fact that the yield has just broken above its corrective green down trendline.
Another arises from the record reading in the ROC that was achieved last year. It's what I call a "mega overbought" condition, where the indicator exceeds any level achieved during the previous bull and bear market. Mega conditions typically signal a change in psychology consistent with a primary trend reversal. In this case, it's an all-time high or a "mega" on-steroids reading, which hints that both primary and secular trend psychology have both reversed.
Chart 5 compares the yield on the 20-year maturity to three confidence ratios. A quick overall review of these series shows that swings in confidence track the yield reasonably closely. Note that the High Yield Treasury spread (HYG/IEF), in the second window, has just started to break out, suggesting that it is about to lead the yield itself in that direction.
The third window compares the SPDR Financial ETF (XLF) to the 20-year + Treasury Fund (TLT). It is currently the strongest of these three confidence relationships and is in the process of re-confirming the April breakout that took place from a lower level. The third ratio, that between Financials and REITS (XLF/ICF), also looks as though it may be basing, but has yet to reappear from its Christmas period doldrums.
Rates are Firming Elsewhere
Chart 6 tells us that the German Bund offered an initial sign of a major reversal, as it broke above the dashed bear trendline. Since then, it has been experiencing a trading range and now looks as if it is about to break to the upside. That's a likely probability because the MACD is also positive.
The UK 10-year yield has been leading the way since its equivalent of the German trading range has taken the form of a series of rising peaks and troughs since last year. Both KSTs are positive, so a new bull market high seems likely.
The Japan 10-year series, in Chart 8, also violated a long-term down trendline, but has yet to complete the global bullish picture with a breakout from its 5-year base.
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.
