Macro Tides – “Treasury Yield Breakout”
At the onset of the Pandemic in early March 2020 Treasury yields plunged only to soar at the height of the liquidity crisis. On March 9, 2020 the 10-year Treasury yield collapsed to 0.398% only to soar to 1.266% on March 18 before plunging anew after the Federal Reserve injected liquidity on March 23. By March 30 the 10-Treasury yield had fallen to 0.599%, and then entered a trading range between 0.50% and 0.75%. The pattern in the 30-year Treasury bond was similar as it dropped to 0.837% on March 9, jumped to 1.940%, and then fell to 1.183% on March 30. The trading range in the 30-year extended from April until late September with the yield holding within 1.12% to 1.54%. The 30-year yield didn’t exit the range on a sustained basis until December. The 10-year Treasury yield traded above 0.75% on a sustained basis after the November 4 election. The move above 0.75% in the 10-year and 1.54% on the 30-year represented a minor breakout. The June 8 spike in yields in response to positive vaccine news is also considered a minor breakout (blue trend line) since it was within the range of the high and low in yields during March. The high in Treasury yields on June 8 was 0.957% for the 10- year and 1.761% on the 30-year.
On February 12, 2021 Treasury yields closed above the intra-day spike highs on March 18. This is significant since those yields were established almost 11 months ago and potentially confirms the four year cycle which I discussed in the August 10 Weekly Technical Review and the September Macro Tides. “
The 30-year Treasury yield has established a high or low every four years since 2000. In 2000 and 2004 a high in yield was recorded while an important low was reached in 2008, 2012, and 2016. This suggests it is wise to be on the lookout for a potential low in the 30-year Treasury sometime in 2020. Even if a low develops, the initial uptick may be modest.” As suggested in the December 2020 Macro Tides, “The four year cycle may become more apparent in 2021 as economic growth improves and inflationary pressures build. The bond market has been known to throw a tantrum and 2021 may provide the right ingredients for another outburst.”
On February 17 the 10-year Treasury yielded rose to 1.331% which is not far away from where the 10-year Treasury yield bottomed in 2012 (1.394%) and 2016 (1.336%). These price lows now represent resistance which should slow the speed of the increase. In addition, the weekly RSI for the 10-year is above 70 which indicates it is overbought. In the past decade weekly RSI readings above 70 have developed near short term yield peaks.
In April and May headline CPI inflation is expected to jump well over 3.0% as discussed in the February Macro Tides. This could push Treasury yields higher after a brief respite. The 50% retracement of the decline in the 10-year yield from its high of 3.248% in November 2018 to 0.40% in March 2020 would allow for the 10-year yield to rise to 1.82% (red line Weekly chart).
The 50% retracement of the decline in the 30-year yield from its high of 3.455% in November 2018 to 0.837% in March 2020 would allow for the 30-year yield to rise to 2.146%. The 30-year Treasury bond has been weaker than the 10-year so it may retrace 61.8% which would target 2.455%. This is just above where the 30-year traded in the fourth quarter of 2019.
The Federal Reserve is not likely to publicly discuss Yield Curve Control (YCC) until the 10-year yield is above 2.0% and the 30-year has breached 2.50%.
Jim Welsh
JWelsh@SmartPortfolios.com
