Yields May Be Peaking for a While
A few weeks ago, I wrote a piece entitled "The Fed Raises Rates; What if it's Already Priced into the Market?". The idea was to point out that the Fed is a lagging indicator and that multiple bond yields had already reached mega resistance in the form of their secular down trendlines. Perhaps, just as the Fed was beginning to raise money market rates, longer-term maturities, which are more subject to market forces than central bank activity, had already factored that into their yield. The bottom line being, whilst longer-term rates will ultimately rise much higher, that was as good a time as any to anticipate a correction.
Rates have not moved much since then and, in some cases, have started to show some signs of short-term weakness, though it's important to emphasize that no serious trends have yet been reversed.
The Long-Term Technical Position
First, let's look at bond yields from that long-term perspective. Previous secular turning points, going back to the nineteenth century, have been characterized by an extended trading range. The most recent one developed between the mid 1970s and 1980s, shown in Chart 1. A potential base has also been shaded in blue. Note that the yield is slightly above the secular down trendline but, nevertheless, facing resistance in the form of the top of the possible base. The bottom window shows that it is currently very stretched against its 96-month MA, almost as much as at the 1981 secular peak. Some reversion to the mean seems likely.
Chart 2 features the 10-year yield and its 18-month ROC. It shows that the ROC is also extremely overbought. From a secular point of view, that record reading is a characteristic of an immense change in psychology. The record, by the way, goes back in my database to 1857. Some would argue that the high reading is less significant, because the comparative lookback observations for the yield were extremely low. However, that was also the case in 1934 following the 1929 equity bear market. Stocks did not do too badly following that and have never returned to the 1932 lows!!
The exceptionally high reading carries an additional message that it indicates an overbought market. Overbought conditions imply the likelihood of a correction. Such a process could well involve, let's say, a retracement of the post-2020 rally to a point somewhere above the lower area of the base at 1.5%. In that respect, the blue line has been inserted as a highly speculative possibility.
The idea of secular resistance is also presented in Chart 3, where it is evident that the yields for the 1-, 2-, 5-, 20- and 30-year maturities are all bumping up against very long-term down trendlines.
One takeaway from the chart is that these yields move in sync most of the time. However, there have been only three times in 25 years when all five simultaneously touched their respective trendlines. Each instance was followed by a yield decline. Needless to say, if a breakout takes place in the immediate future, that would be super bullish for rates, as they will have overcome a resistance tremendous barrier confirming beyond a reasonable doubt that 2020 experienced a secular low.
The Near-Term Picture
Chart 4 features the 10-year Yield, together with its 9-day RSI and daily KST. No trends have yet been broken, but the yield could well be in the process of tracing out a small head-and-shoulders top. If it is completed, the short-term KST is certainly in a position to pressure a decline. So too is the RSI, which has just violated an up trendline.
Chart 5 compares the iShares 7-10-year Bond ETF (IEF) to my net new high bond indicator, which you can read about here. The ETF has just touched support at a time when the oscillator reached a record oversold reading. The green arrows show that, when it has reversed from an oversold condition, a rally has typically followed. It has not yet reversed to the upside. However, being in such an oversold state, it is unlikely to maintain its downtrend for much longer.
The Yield Curve Inversion Has Been Greatly Exaggerated
As an aside, there has recently been an unprecedented amount of attention fixated on the yield curve. Usually, when the consensus of the financial community focuses on a specific aspect, the expected event fails to transpire. In this case, a recession. Yield curves come in many shapes and sizes, but all compare a short- to a longer-term maturity. When both yields reach the same level, this is known as an inversion. Inversions reflect the cumulation of a tighter monetary policy. All recessions since the 1970s have been preceded by an inversion.
Chart 4 features two versions of the curve the 2/10-year and the 6-month to 10-year. The 2/10 series has been rising rapidly, a process known as flattening, as the two rates come closer to each other. It almost inverted this month. However, the highly Fed sensitive 6-month/10-year version has hardly moved at all, as it reflects that the Fed has been slow to the party. The vertical lines approximate the beginning of recessions. Note that all six were preceded by both series inverting. The business cycle has repeated throughout recorded history (220-years), so a recession is all but inevitable at some point. However, the current yield curve dichotomy argues that now is not the time to be overly concerned.
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.
