Ten-Year Treasury Is At Crucial Chart Point

via John Murphy

TEN-YEAR TREASURY YIELD IS AT A CRUCIAL CHART POINT … Treasury bond yields are going through an important test of overhead resistance. Chart 1 shows the 10-Year Treasury yield ($TNX) challenging its May 2018 intra high near 3.11%. After pulling back from its May high, the TNX entered a sideways trading range that lasted from the end of May to the start of September. Last week, however, it rose above its summer highs to reach the highest level in four months. As discussed in previous messages, the May peak represents an important long-term resistance barrier.

MONTHLY BARS SHOW WHY MAY HIGH IS SO IMPORTANT … If you’ve been reading messages on this site, you’ve seen this chart before. The monthly bars in Chart 2 show the same 10-Year Treasury yield forming a potential “double bottom” between 2012 and 2016. It’s now in the process of challenging the peak formed at the end of 2013. A move above this year’s spring high would constitute a major bullish breakout, and would put the TNX at the highest level in seven years (since 2011). It would also break long-term down trendlines extending back for several decades. The 2013 peak followed the “taper tantrum” caused by the Fed’s mentioning that it would start ending its policy of quantitative easing (and lower interest rates). The Fed is now in in the process of raising short-term rates (which is expected to continue with another rate hike this afternoon). That should continue the upward pressure on bond yields. Rising bond yields are also reflective of strong economic conditions, and some easing of global trade tensions. But there’s another important factor supporting higher Treasury yields. And that’s the fact that foreign yields are also starting to rise.

BRITISH 10-YEAR BOND YIELD IS ALSO RISING … Lower bond yields in foreign developed countries have acted as a weight on Treasury yields. Lower yields abroad encouraged fixed income investors to buy higher-yielding Treasuries. As a result, that kept Treasury bond yields from rising. Foreign yields, however, are starting to rise as well. Chart 3 shows the 10-Year UK Treasury Yield (through yesterday) rising to the highest level since the start of 2016. UK yields are actually rising faster than in the states. Over the last month, the 10-Year British yield has risen 33 basis points, versus a 27 bps rise in the 10-year Treasury yield. By comparison, the German bond yield has risen 19 bps over the last month. That’s less than the U.S or the UK. But it too is rising.

GERMAN 10-YEAR YIELD ALSO TURNS UP… German yields have been held back by a more accommodative QE policy in the eurozone. The ECB, however, this week confirmed its intention to end its bond-buying program by the end of this year. That has helped lift German yields which serve as a benchmark for the eurozone. Chart 4 shows the 10-Year German Yield rising this week to the highest level since May. That reverses the downtrend trend that existed since February, and again since May. Rising yields in the eurozone are also supportive of rising yields here in the states. The weekly bars in Chart 5 show the 10-Year Bund yield bottoming during 2016, as did yields in the UK. That 2016 upturn in foreign yields coincided with a similar upturn in Treasury yields. Lower yields in Europe since the start of this year acted as a drag on Treasury yields. With those yields now rising, the odds of higher yields in the states look a lot stronger. That view of rising global bond yields is further supported by rising bond yields in Japan.

JAPANESE BOND YIELD IS ALSO RISING… Japanese bond yields are the lowest in the developed world. That’s due to an unsually loose monetary policy in that country, which has been specifically designed to keep the 10-Year Japanese bond yield close to zero. Japanese bond yields, however, have also started to creep higher. Chart 6 (plotted through yesterday) shows the 10-Year Japanese Yield still trading at a relatively low level of 0.14%. But even at that low level, it has risen to the highest level since the start of 2016. Small as that move is, it also supports the trend toward higher yields in major developed countries. And it may reduce the need for Japanese investors to buy higher-yielding bonds abroad, including in the U.S. That also supports the trend toward higher global bond yields, and an eventual upside breakout in Treasury yields.