Rising Rates Put To The Test

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by Dana Lyons

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Long-term interest rates are facing a potentially key test on their path to higher levels.

Everyone knows that U.S. interest rates have been in a secular downtrend since the early 1980’s. As a result of action taken during the financial crisis, that downtrend accelerated, creating an “extraordinarily low-rate” regime. As we noted at the beginning of 2017, the 10-Year U.S. Treasury Yield (TNX) finally managed to break above the confines of that extraordinarily low-rate regime — and back into the “normal”, multi-decade downtrending rate regime.  In early February of this year, we noted the fact that the 30-Year Yield (TYX) was attempting to break out of its own “extraordinarily low-rate” regime.

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As it turns out, the TYX was successful in its breakout attempt, facilitating a swift jump from around 3% up to that resistance that we laid out near the 3.22% level. In the month since, the TYX has gradually pulled back off of that resistance. It is now back down to its “regime-defining” breakout point near 3%. This could be an important test for the long-term rising rates campaign.

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In the long-term, we think rates are headed materially higher for years, and even decades, to come. If the 30-Year Yield can hold this ~3% level and rebound in short order, it will bode well for the prospects of a continued march higher for rates in the near-term as well. If the TYX fails to hold here in the 3% area, then it’s a good sign that more work needs to be done, i.e., consolidation or further pullbacks, in the near-term before resuming the long-term ascent.

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