Although yields have risen lately and as a result bond prices have fallen, this is no party for bond bears. The 2.40% level in the 10-Year Note yield is very important and although it was reached twice before, in October of 2011 and in March of last year, the rally quickly fizzled and new lows were reached in July of last year just below 1.50%. Will this time be different with the bears getting the downtrend they are hoping for?
In my last post about bond yields, on March 20, 2013, I wrote:
The 10-yr yield is now testing the lower trendline of the up-channel that formed since the start of this year. Very strong support is at 1.84% and below that is the 200-day moving average support at 1.72%. This latest level could be reached if there are some bank defaults in EU due to current situation. If a solution is found soon yields may rally strongly to test the 2.09% high and towards 2.20%.
The solution in Europe came in the form of a brutal depositor bail-in and things have calmed down a little but the EU is like a huge volcano ready to erupt. The lenders in Europe refuse to offer any kind of a new deal to the borrowers and enforce austerity instead. This cannot last for long as in the past similar economic conditions have led to unprecedented unrest and wars. Lenders must also accept a haircut because lenders cannot exist without borrowers. It appears that European lenders do not want to accept this fact and want to preserve their purchasing power at any cost. This for now keeps rates low because inflation is under control. But at some point the demands of the masses (the borrowers) will either be met with higher inflation and lower bond prices as a result, or social unrest will erupt with worse consequences. Germans leave in a dream world if they think that austerity can go for much longer in Europe. That part of the world is notorious for its brutal conflicts. Germans will soon have to give in, and either accept higher inflation of leave the euro altogether before it is too late.
It may be seen from the above daily chart of the 10-Year Note yield how the horizontal resistance at 2.40% was tested twice in 2011 and 2012. The last test was followed by another all-time low below 1.50%. Is this time different? I am not sure and definitely I am not a prophet. All I know is that technical analysis can not be used for forecasting purposes but it can be used as a risk management tool. Thus, I would not bet a lot of money on a bond bear market unless I saw the 2.40% taken out decisively.
The longer-term chart of the 10-Year Note yield shows the downtrend clearly and that the recent spike in yields is for now irrelevant to the overall picture. A rise in yields will become relevant if the 3% level is reached. Then we can safely talk about the possibility of a bond bear market. For now, nobody can tell if the recent rise is due to random volatility or due to a deterministic trend supported by changing fundamental conditions. It is just too early for that.
Disclosure: no relevant position at the time of this post and no plans to initiate any positions within the next 72 hours..
Charting program: Amibroker