Citi: "Time For Yields To Correct Lower"

Tyler Durden's picture

The end of 2013 saw bond yields at their highs and the US equity markets making higher highs. This came as the Federal Reserve started to finally slow down its asset purchases and, as Citi's Tom Fitzpatrick suggest, has now seemingly turned a corner in its so called “emergency” policy. That now leaves room for the market/economy to determine the proper rate of interest; and, he notes, given the patchy economic recovery, the fragile level of confidence and the low levels of inflation, Citi questions whether asset prices belong where they are today. As the Fed’s stimulus program appears to have “peaked” Citi warned investors yesterday to be cautious with the Equity markets; and recent price action across the Treasury curve suggests lower yields can be seen and US 10 year yields are in danger of retesting the 2.40% area.

Via Citi FX Technicals:

Time for yields to correct lower...

At the end of 2013 yields finished at the highs of the trend. However the recent attempts to push beyond 3% have so far failed suggesting a double top is in the making as we have seen on many occasions over the years

Support levels are at 2.41%-2.46% which should be tested. A weekly close below there if seen (not the base case scenario at this stage) would warrant further concern.

Interestingly enough, this comes at a time when the Federal Reserve has slowed down its asset purchase program. This reminds us of the last time the Fed tried to end its QE program...

Yields initially rose and then turned down when the Fed tried to end its emergency QE program in 2010 and 2011. We would not be surprised to see a similar situation playing out, albeit on a smaller scale for now.

The economy was not as strong as expected/hoped for and yields did what they naturally do when the economy is weak and inflation is low…they moved lower. Since the Fed has started to take the “foot off the gas” - which initially led to higher yields - it now leaves more room for the underlying economy to determine the rate of interest

Following the evening star pattern at the highs on the weekly chart and the weekly momentum crossing back down from stretched levels, we would expect a test of the support levels at 2.39%-2.46%

A weekly close below that range of supports would suggest much more concern and the possibility of even lower yields. The double top would then point towards a move to below 2% again (not our base case scenario at this stage).

What will be increasingly important going forward will be the state of the economy (unless of course the Fed has any surprises up its sleeve but we won’t enter that for now). A quick look at some key Techamental charts gives a clue about what could be around the corner...

Consumer confidence turns after going up for 4 year and 4 months

All three cycles so far have seen confidence rise for 4 years and 4 months before turning down again. Confidence is fragile and at risk of moving down

Mortgage rates and Consumer confidence

The rise in mortgage rates has in the previous two cycles corresponded with the peak in confidence.

The chart below indicates that the enthusiasm in some parts of the housing market may be a little stretched

While there has been some recovery, the NAHB Index (ISM of housing) has gotten ahead of itself

The enthusiasm surrounding the housing market appears to be out of place

This is quite similar to 1993 and 1998 where the NAHB Index was “out of line” with housing starts and building permits. What followed was a decent correction down.

Consumer confidence and initial jobless claims

Typically consumer confidence has moved lower as initial jobless claims rise

Initial claims have recently been making higher highs and higher lows off of a historically low area. Should we see a trend higher begin to materialize, it would be concerning for Confidence.

US Core PCE Inflation

Doesn’t really argue for much higher yields

US economic surprise index

General economic surprises look like they are now approaching a peak again.

Only twice over the past 7 years have we been above current levels and they were short lived.

We should note that this index is naturally mean reverting as expectations rise with better than expected data and vice versa. A fall back below zero if seen may be quite important.

Back to markets...

US 30Y Yields...

As we can see in this long term chart, US 30 year yields rose throughout the course of last year to test the multi-year channel top just under 4.00% (the high was 3.97%)

However yields effectively went there twice, providing a double top setup similar to that seen on US 10 year yields. Again, we can see that double tops have been fairly common on US 30 year yields over the years

While we believe that over time US 30 year yields can eventually take out the 4.00% area, at this stage the danger is that yields move lower to at least support levels in the 3.46%-3.56% area.

US 5Y Yields...

US 5 year yields posted an outside week down at the highs last week.

Good supports converge at 1.24%-1.27% where previous lows and the 200 week moving average converge.

The 55 week moving average is just below those levels though is upward sloping.

US 2Y Yields...

Outside week down here on US 2 year yields too

A test of 31 basis points is expected

Overall in an environment where:

  • Yields hit the highs of the year at the end of 2013
  • The stock market is at the highs and has rallied on the back of on-going Q.E
  • The Fed’s “emergency” stimulus has turned a corner / “topped out”
  • The US economic recovery is patchy
  • Confidence has likely peaked in this cycle
  • Inflation is at the lows

We would not be surprised to see a turn in both bonds and stocks over the medium term

US 10 year yields are in danger of moving down to the 2.40% area, with 30 year yields likely to test 3.46%-3.56 and 5 year yields heading towards the 1.25% area

A break of those levels would be a major concern though that is not at this stage expected

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LetThemEatRand's picture

Maybe the Tylers were just on vacation.  I'm noticing some of the old flavor again.  Or maybe the doc adjusted my thorazine levels again.  Who knows.

1C3-N1N3's picture

Tyler: We too have our price.

Lots of folks on that thread not here anymore. Where'd they go?

merizobeach's picture

From the flavor of many of those comments, and the op-ed itself, I am inclined to wonder if the missing commenters, and even the (missing) Tyler that wrote that piece, may be interned at a FEMA residence.

StychoKiller's picture

If you were really taking thorazine, it would seem like hours to form a simple train of thought.

buzzsaw99's picture

Citi's Tom Fitzpatrick suggest, has now seemingly turned a corner in its so called “emergency” policy. That now leaves room for the market/economy to determine the proper rate of interest...

He's joking, right?

LetThemEatRand's picture

So you're saying it's the Thorazine?

buzzsaw99's picture

Yeah. Here's the only chart anyone needs: Stock market goes down, bonds go up, QE goes up, stocks go up, Thorazine goes up. 'Round and 'round she goes, where she stops nobody knows!

disabledvet's picture

these markets are Planets..."they move themselves." Obviously one can THINK they're moving the market...but that "one" would have to be a total lunatic to actually believe that. (Yes, they go to MIT.) So maybe the question has always been not why equities have moonshot...but why have Treasuries? We never had QE during the Depression...we ramped it up massively..."to fight and win World War II." That ended in the 1950's because it was all the USA could do to battle inflation during World War II. "that's when 4 percent was considered a lot of inflation." Now it's two percent and "that other guy is fighting the war" right now. Believe me...I know what it means to travel light.

Hmmmm. "So Google will run the war effort."

CrashisOptimistic's picture

So maybe the question has always been not why equities have moonshot...but why have Treasuries?


Dood, you say such bizarre stuff.  Over and over.  What the hell are you talking about?  Treasury yields have been in decline for 30 years.  They haven't moonshot since equities did.  They've been ramping for 30 fucking years.  Where have you been?

RiverRoad's picture

It's not a market, it's a Ouija board and you know how those work, right?

Ned Zeppelin's picture

Yes. Complete horse shit. What taper?

Please. This is propaganda, not analysis.

1C3-N1N3's picture


Hence my post above.

Tyler found his price.

Whether it was too much to pay or too much to turn down, the result is the same. He gone.

And seriously, I'd like to know where else the old commenters are commenting these days. This whippersnapper wasn't done learning yet.

Dr. Engali's picture

If they want to drive yields down to 2.4 they will need to sacrifice the stock market in order to catch the 'safety bid'. The only way for yields to collapse and the market to rise is to expand QE.

disabledvet's picture

no. "you sacrifice Detroit" et al. "This scares people" causing them to run to Treasuries. Equities think with their "bionical"...namely, "we're getting rid of the overhead." This is the problem with bank bailouts...the "what have done for me lately" after having given them trillions.

With liquidity (inflation will do) there's no issue of a return OF capital.

Without liquidity "you bring in El Cheapo" into the equation. This country has already navigated through the 70's "and via the 80's, 90's and 2000's and adjusted accordingly." QE looks like OverQill to me.

Import prices haven't just been falling for two straight years...they're collapsing. This is WITHOUT importing oil. "And now it's time to export oil"? REALLY? WHERE? TO WHOM?

You wanna turn the video game into your war effort?

Or how about this:

I think the folks yanking their money out of Pimco are doing exactly the wrong thing at exactly the wrong time...but we'll see.

OC Sure's picture

I've been of this inclination for over a month now. Bonds began bottoming on December 6th. They will have completed that process if this last week's morning star holds. Sentiment per the c/p ratio is very optimistic but it is just a cautionary flag until price confirms. Next stop is the resistance off the 134 level, then the 140 level. We'll see.

rbg81's picture

This is really no surprise to anyone who has been paying attention.  The Powers-that-Be will not allow 10YR UST yields to break over 4% under any circumstances.  The 3% threshold is their Maginot line--if it gets over that they start shitting their pants and taking corrective measures--including calling in favors + making threats.  

Over 4%, interest on the debt becomes unsustainable and the Entitlement Machine  will start to lock up.  Riots and chaos will ensue.  In fact, I think rates will fall below 2%, then 1%.  Eventually, the System will collapse, but we are not even close to that yet.  For the forseeable future, Savers will continue to take it up the ass for the "Common Good".

CrashisOptimistic's picture

Or maybe when economic activity is in relentless decline, so shall be yields. 

For 30 years.

When there's decline, there's less demand for loans.  If you want people to borrow, you have to reduce interest rate to get them to.

rbg81's picture

I think the end-game is to have negative interest rates.  Basically, you pay the Bank between 1-2% a year to "preserve" the bulk of your capital.  With the Government getting half of this bonanza (of course).  

They will come up with a fancy name for it, but it will be a Wealth tax, pure and simple.  And if you don't like it, then you're a....racist, homophobe, climate-denier, war on women, greedy Capitalist pig.


LetThemEatRand's picture

And if you like it, you are the Fed.  A constortium of private bankers who convince tools like you (or perhaps you are convincer?) that the problem is poor people.

rbg81's picture

If you like it, then you are either the Fed, a politician, government bureaucrat, banker, a member of the Free Shit Army, or......a Kool-aid drinker.  With regard to the last, there are more out there than you can possibly imagine.

OC Sure's picture

Apparently it has been a surprise to all those caught short at this (intermediate) bottom. I need to look at the price action day to day and proceed accordingly. Your aye is too general for me take comfort in a position. But PRICE ACTION! Aye, there's the rub.

shutdown's picture

Those silly voodoo chart readers might as well be reading tossed chicken bones.

OC Sure's picture

Is there a market for those bones and where is the chart please?

See Technical Analysis of Stock Trends; Edwards and Magee, 1948.

...Basically the pictographs of what Jesse Livermore would do in his head.

Go figure.

RiverRoad's picture

Somebody's been snapping up closed end munis like there's no tomorrow.  Maybe they're right.

q99x2's picture

Every time I see that name "Citi" I cringe. That's my bank. I hate them.

Vint Slugs's picture


So what's with all the recent flogging of institutional TA?  So much BoA and CitiFX.  Is this a function of what I see recent comments referring to the new ZH ownership?

Maybe ZH is taking sponsored contributions (if so what's the going rate per article)?  Or maybe one of the Tylers just has a crush on banker market research?

wisehiney's picture

Short treasuries are you?

fonzannoon's picture

Actually I am happy to see the TA. Granted i'd rather it come from ZH than BAML etc... But I've been giving Tyler shit for all the unending Michael Snyder/Simon Black stuff. I've posted it before but for those who have been here a while, they remember it was the market related stuff that put ZH on the map.


BillyTheBlade's picture

Man, what is going on at Citi? This is the third or fourth über bearish story in the last week I've heard out of them. It's about time...

TheRideNeverEnds's picture

leaves room for the market/economy to determine the proper rate of interest


hahahahaahaa; yea right, the 10 year would go back to like 10%+





wisehiney's picture

Nope, without the fed pump, markets crash, rush to "safety", 10 yr negative yield. Nice gain from here. Sell it quick though. Cause that's when they DO go zimbabwe.

Boston's picture

I agree.


2.4% on the 10yr is a very conservative target. More aggressive is 1.4%. Most aggressive is 0.6%.

Study Japan.

I've made lots of money buying the 10yr when it's near 3% and just hanging on (2011 was like hitting the lottery). This time should be no different. If I'm wrong, I'll just roll down the yield curve. Great trade---can't lose.


Clowns on Acid's picture

Like the trade. Hate when you say "can't lose". Loosah.

Boston's picture

For slower thinking folks (like you) out there, please interpret my "can't lose" as "high probability". 

Happy now?

hugovanderbubble's picture

Tom Fitzpatrick one of the best FX Technical Analyst Worldwide.Regards

Space Animatoltipap's picture

Perhaps, but likes to leave out certain info. eg Manipulation of interest rates, QE policy, the evoluation of the POG. Oh wait, technical developments doesn't deal with conscious behaviour is of course the weird fantasy. Now I understand.

wisehiney's picture

Whipsaw time. Lean em way over there. 1.5, BAM 3.0! Lean way over there. 3.0 Bam! 1.5
Really been nice getting paid that 4.5 the past few years while gaming the game. The credit markets are trillions, the debt loads weighing it all down by trillions. The fed is dealing with billions. It took all the derivatives and propaganda they could muster to push 10 yr to 3. They sure as hell cannot keep it that high. Cap gain time.

Rubbish's picture

Put your faith with the Feds? Wishful thinking....

StychoKiller's picture

These "conventional" economic analyst jackwagons have been wrong about so many other things, what if they're wrong about the direction of interest rates as well?

wisehiney's picture

Citi should give ZH credit for this analysis. They even used the same charts.