Double Top Formation Suggests 2.2% Or Lower Yields For The 10 Year, 2.8% For The 30

Tyler Durden's picture

While traditionally technicals have been considered voodoo by the vast majority of "legitimate" financial analysts, lately the trend has flipped, and scribbling that one is something as demode as a fundamental analyst tends to generate scowls of disapproval and outright disgust from PMs with a 10 second holding horizon during hedge fund interviews. Which is why looking at the chartist tea leaves, as Goldman's John Noyce has done, suggests that those looking for much more irrational exuberance in bond yields may get their wish, as a double top formation may be forming in 10 Years. The result of a broader double top would likely be an end target of between 2% and 2.2% in the 10 Year, and something potentially as low as 2.84% in the 30 Year, which would probably put all those with TBT exposure in the poor house.

Which of course is horrible news for all those who are still holding on to steepeners on a prayer. Noyce looks at the 2s10s and sees the 200 WMA as a potential target in the current break, meaning we could soon see something as low as 154 bps on the 2s10s as flattening steamrolls over the formerly biggest groupthink trade of the year. And those holding on to hopes of tail end steepening as Morgan Stanley will have you do, may as well abandon all hope: the chart suggests that the 2s30s will go flatter by another 110 bps , or down to 220. How many trading desks will be decimated as a result is unknown.

Extrapolating the rate message into the FX arena likely means that those, such as the BOJ, hoping for a drop in the JPY are in for a long wait. As Noyce says:

Bringing it all together, it’s tough to look for a sustained recovery in USDJPY unless something significant changes with the outlook for yields or well established correlations change

  • This chart shows USDJPY spot in blue overlaid with an equally weighted basket of the 10-, 5- and 2-year U.S./Japan yield spreads in green.
  • As can be seen the two are very highly correlated from a trend perspective.
  • To generate a sustained recovery in USDJPY it would therefore either require a sudden turn in the yield picture, which we don’t really have any concrete signs of as yet, or a significant change in correlations, which it hasn’t paid to look for over recent months.

Yes, chartism is the devil's work, and tends to have a reputation of curve fitting (no pun). However, with few things mattering any more for long-term thesis, now that instantaneous liquidity is of paramount importance and hedge funds actively advertise it, dismiss charts at your own peril.

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Young's picture

Of course it's TD who noticed that. Magnet-time bitchez!

Magua's picture

Yup 2% ten year, 2.5% twenty year, and sub 3%, 30 years are in the cards. All the talking heads on CNBC talking about the bond bubble have it right and wrong. There will be a bond bubble blowup, but it is going to begin at MUCH lower yields.

And oh yea, we will be hoping and praying that the bubble pops at that point.

Young's picture

Yes we will... And christ what chills we will feel if it does not stop there!

-1Delta's picture

Flatting bitchez

Tense INDIAN's picture

charts relating to bond markets can be trusted  much more than the equities

Dismal Scientist's picture

Technical analysis is loathed by the fundamental crew; unless its dressed up in the pseudo science of behavioural finance. A case of do as I say, not as I do, since I do not know a single buyside investor that does not use charts every single day. Another huge hypocrisy in finance.

I am waiting for the first buyside investor now to tell me that this makes equities look even cheaper than they already are on forward dividend/earnings yield to bond yield. And then I will hit every bid he cares to make.

Cognitive Dissonance's picture

Another huge hypocrisy in finance.

A person's worldview, which most certainly consists of a person's "view" of how the various economic markets and systems actually "work", is seldom constructed out of logic or critical thinking. In fact very often, and much to the chagrin of those who consider themselves logical and educated, in order to maintain a worldview chock full of self deception, wishful thinking, multiple contrary posistions held at the same time and all the rest of what goes into being a functioning citizen of a country and world torn apart by manipulated and distorted reality, logic is the enemy and hypocrisy is the (facebook) friend of our worldview.

In fact, I would contend that one of the keys to success in today's world of the glorious global Ponzi is to maintain a....how should I say this.......flexible relationship with facts, figures and honesty. In fact, to be rigidly honest and a stickler for consistent thinking and opinions places you firmly on the outside of the sociopathic playpen called Wall Street/Pennsylvania Avenue. :>) 

Dismal Scientist's picture

'...places you firmly on the outside of the sociopathic playpen called Wall Street/Pennsylvania Avenue'

I guess thats why I'm here, CD ;-) You express yourself eloquently, as always. Me, I just recognise assholes when I see them. And I see them ... everywhere.

Cognitive Dissonance's picture

Shush.

Didn't you get the memo? And public airing of dirty laundry in the Precious Metals markets, even if it's not Gold, will only draw further unwanted attention to the crass and blatant manipulation in those markets.

Ixnay on the Metalsnay.

Ripped Chunk's picture

Front page of the Murdoch Journal today.

Cognitive Dissonance's picture

Sometimes the best place to hide something in right out in the open. Especially if you control the news flow or "news events" enough so that you can assure yourself it will rapidly become old news.

A favorite placement for "bad" news is the front page of the newspaper on a hot summer Friday, where it will soon get lost over the weekend. And hopefully some country will invade another or some celebrity will lose her bikini top while swimming or some actor will get drunk and piss on some cops shoes over the weekend, making that the water cooler topic Monday morning.

And if that doesn't "happen" they can always make some shit up.

Ripped Chunk's picture

Makes sense since most of the non-believers are heavily medicated these days and will likely forget that they read anything other than a meth recipe.

Why anyone would refer to the WSJ for anything after Murdoch bought it, I have no idea. 

Josephine29's picture

In terms of a more fundamental analysis there may be some backing for this chart view.The notayesmanseconomics blog has some quotes from a presentation by a member of the Federal Open Markets Committee James Bullard and concludes.

"To my mind Mr.Bullard is indicating rather openly that he is considering a new wave of asset purchases by the US Federal Reserve and is hinting that this time round it will be based on purchases of US government debt if it happens."

So perhaps it is possible that the fall in bond yields might be driven by the Fed. and those interested can find it on http://notayesmanseconomics.wordpress.com

Headbanger's picture

Very clear 5 waves up pattern in that 10yr chart from the 2.05 low with about a 75% retrace down so far. We could see the low 2 area but a break above that downward trendline would portend the end of the move down and perhaps sharply rising rates.

Cognitive Dissonance's picture

Doesn't your avatar have a really bad headache after all that headbanging? I'm just askin' because I worry about you. :>)

Headbanger's picture

Nahh.. You get used to it after a while.. But thanks!

kaiserhoff's picture

About all Ben and Timmy have to show for our trillions is a boat load of unintended consequences.  Here's one that deserves more attention. 

If long rates continue to decline, Fannie and Freddie's 7 trillion (the admitted number) of mortgage holdings will be rolled over into 2-4 percent paper, essentially worthless when interest rates snap back to normal.  Now multiply this by the same problems faced by insurers, pension funds, etc.  Every form of refuge has it's price.

Cognitive Dissonance's picture

I was thinking about this last week. But you know, when they've got their Ponzi on, all that counts is animals spirits. When you go through the day with a big bad boner, everything looks like a hole to you. Worse, ya just gotta do something with it.

The Fed, thinking with it's little brain 24/7/365. Desperate men will do desperate things.

Timmay's picture

Lower yields will encourage more Government borrowing. Lower yields will raise the values of previously issued debt. So, the march to the bottom helps Government financing and assets values of the Lenders to the Gov. How long will it be before we say, "Remember when the 10YT was at 3%? man, I wish I jumped on that trade!" 

 

Sharp rise in rates will leave catastrophic destruction for "someone"...

Don Levit's picture

Cognitive Dissonance:

Beautifully explained.

It reminds me of a guote, I think, from Grover Cleveland:  "The truth will set you free, but first it will make you miserable."

Speaking of low interest rates, I am under the assumption that insurers are heavily invested in bonds, as opposed to equities.

I have seen no raise in my dividends in 10 years on about 8 whole life policies.

  Even on new illustrations, projecting dividends, they are projected to stay the same!

By the way, I have no policy loans.

This, to me, is a bad signal for the future.

Don Levit

Vampyroteuthis infernalis's picture

Fundamentals don't count if the system is rigged by the gubimint. They have not for the last few years since the crisis has raged on and bubbles propped up. The charts are vastly more reliable. All of the fundamental investors deserve to go hungry as yields drop before spiking during the deflationary collapse.

kaiserhoff's picture

Ben has an absolute fetish about banks.  You may have noticed.  So here's a thought experiment for one and all.

Banks, by definition, are in the business of borrowing short and lending long.  So what happens to banks when they get caught with loads and stacks of low interest bonds and notes on their books?  Oh wait.  I already know this one.  Something much like the Savings and Loan Crisis happens.  Oh well, as the local rednecks say, what goes around comes around.

trav7777's picture

Yields are in secular decline because demand for money has decreased.  Interest rates are the price of money.

the Fed is probably distorting the curve with their OMOs, but they hope to get some activity by the salivating would-be speculator knife-catchers out there.

Already people are abuzz with talk of how "great" a time it is to buy, what with houses "so cheap" and rates so low.  The Fed's hope is that credit demand will pick up and then rates can normalize.  What we have here is a loss-leader teaser sale on credit.  One that the .gov is gorging itself on.

Just imagine what would happen after the gov has stuffed itself to the gills with cheap credit and then rates were to go up.  It'd be game over immediately.

Headbanger's picture

And it would be hyperinflation time!

centerline's picture

Thats my concern.  Making a huge bet right now.  Or in other terms - at the end of the rope and doing whatever is necessary to buy a little more time.  All hope riding on someone else to implode before we do.  Kind of like a whole bunch of people falling, fighting on the way down to see who hits first!  Like it really matters in the grand scheme of things.  I suppose it is more about political blame at that point.  Got to find the bagholders.

Ripped Chunk's picture

"Already people are abuzz with talk of how "great" a time it is to buy, what with houses "so cheap" and rates so low.  The Fed's hope is that credit demand will pick up and then rates can normalize"

And the people that do buy now are right without even knowing that they are.  Many may hang on to their homes through the coming depression. The remainder will have great stories to tell around the campfire. "Did I ever tell you about the the year when we owned a house!!!"

Trichy's picture

Have to give it to them,

TPTBs plan is a good one!

DoctoRx's picture

Too many bond bulls all of a sudden to make me happy . . .

I don't think there are many new buyers of the 10-year under 3% yield who actually want to hold that baby till maturity.  Thus I think the bonds are in weak hands.  Mo-mo.

In contrast, I'm thinking that many or most people who are buying gold at this level, which has gone nowhere since the December 2009 high, actually want to own it at least for the intermediate-term if not for the long term.

Which group of owners of assets do you want to be "partners" with, gold owners or long-term Treasury owners? 

Prof Gulliver's picture

Agreed. No one is going to hold on to a crappy yield for 10 years when it looks like they'll also be taking a giant haircut on the price. These new bond mo-mo monkeys are going to get out fast as soon as the yield rises/price drops even a bit. Then the floodgates open. 

fiddler_on_the_roof's picture

Good thinking. I guess one needs a Psychology Major to be an investor.

Blegoo's picture

Charts reflect reality.

HFT got rid of individual investors.

Government data can't be trusted.

There're lies, damn lies and statistics.

rolo's picture

I must admit I have never quite understood the venom spit against technical analysis.  Especially when legendary fund managers with great track records freely admit to using it - Paul Tudor Jones, Kovner, Druckenmiller, Anthony Bolton to name a few.  You don't have to make it the only thing you look at but it can often give you another read on a market which you might not get otherwise.

It gives you a cold unemotional view of a market and its trend.  I'm not sure I agree with the chart patterns themselves but breakouts and general trends can be useful indicators, in my experience.  Of course, they can be wrong, but so can a fundamental analyst.  But that's why we use risk management, right?

99er's picture

Chart: GC

Continuing "flight" to safety.

http://www.screencast.com/t/ZjQyMmI0

Miles Kendig's picture

As some others start to look at the potential that a 150 2/10 print may prove conservative... for some time.

PANCAKE BITCHES !

Ned Zeppelin's picture

Interesting food for thought article on the UST "Bubble"

http://pragcap.com/the-myth-of-the-great-bond-bubble

Avoids an important point: what if stealth monetization is source of $ to acquire bonds?

 

Miles Kendig's picture

Ned hit it with a time on target barrage, just as monetary authorities attempt the same in turning Tibet into Kansas.

iPood's picture

 From the article:

What do we care if  [China or Japan] buy our bonds?  China’s ownership of US government debt has dropped to the lowest level in at least a year the Treasury said in a report on international capital flows.

 

But U.S. treasury yields continue to plunge.  The demand for this paper is enormous even though the largest holder of these bonds appears to be getting scared off.  The demand is well beyond what the Fed even requires (as previously explained).  While the Chinese fret about U.S. insolvency we’ll gladly keep sending them pieces of paper in exchange for real goods and services. 

I would have liked him to be more specific in identifying actually whom he sees supplanting flagging demand from China and others, should  that occur. He seems too flip in his assertion that demand for this paper, absent monetization, "is enormous."

Don Levit's picture

I'm going to ditch all my stocks and bonds in favor of equity-indexed annuities.

If the S&P rises, I capture the gain (up to 16%).  If it falls, I lose nothing.  In fact, if it falls, I have a lower base from which to grow the following year.

With a minimum return of 2-3%, why would anyone buy a taxable Treasury?

Don Levit

Trichy's picture

...and who is backing those? 

Ripped Chunk's picture

The full faith & credit of Obamaland!!!!

Don Levit's picture

The insurer is backing them.

Don Levit

Eric Cartman's picture

Maybe I should sell a few TBT Calls a few months out and collect a nice little premium. 

Eric Cartman's picture

Maybe I should sell a few TBT Calls a few months out and collect a nice little premium. 

Herry12's picture

There are certainly a lot of details like that to take into consideration.I read and understand the entire article and I really enjoyed it to be honest.
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