Last week we showed that the 10Y was on the cusp of breaking out above the most critical trendline of this decade. Well, following today's largely illiquid surge in the dollar and selloff in the Treasury complex, briefly halted by the steller 7Y auction mid morning, the trendline has been officially broken.
The 10Y UST Trendline That Goes Back To 2010 Is Broken
Now, as a trading desk put it, "is when it gets interesting." As RBC's head of cross-asset strategy Charlie McEliggott summarizes today's move, "the duration unwind continues." More:
"Messy move higher as the DXY breaks-out to new 13-year highs on continued strong US data (esp Durables print). $/Y goes full ‘stop hunt’ mode into peak pre-Holiday illiquidity, currently +170 pips as well (pounding table on that long Nikkei trade FTW) while the EUR breaks down, contributing to UST yields trading dysfunctionally higher / curve steepening. As such, classic risk-parity pain-trade ensues-- developed mkt sovereign bonds, stocks, EM, credit and commodities (ex-crude) all under the cosh right now at the same time (shocker--a strategy built on a core concept of ‘negative correlation btwn bonds and risk stocks’ is going to be exposed in a regime change of this magnitude).
His forecast: "Next stop: 10Y UST yields at 2.50 and then nothing until 2.90 (overseas buyers noting both levels before any ‘dip buying’ consideration) and 30s at 3.15, then 3.26 per RBC Macro ninja Mark Orsley."
Aside from Tsys, this is what McElliggott thinks will happen to other asset classes:
Outside of the massive “reflation / pro-growth” focus, the Trump election is accelerating a shift that was already in motion from the major CBs months prior—that is, a shift away from ‘monetary policy’ as the focal point of asset price--and focusing instead on ‘fiscal policy’ stimulus moving forward. Under the ‘old’ regime, financial repression was the tool to force investors out onto the risk curve (create a ‘wealth effect,’ contribute to inflation). As such, investors went “long equities / long credit / long flatteners” and were effectively / synthetically “short volatility.”
Now, with CB’s trying to steepen curves / drive long-end rates higher, there is an inherent re-introduction of dispersion into the market; a correlation breakdown into the market; and an injection of volatility back into the market—as the multi-year “secular stagnation” narrative (at least temporarily) is being reset. Thus, investors and asset allocators are being forced to make major portfolio strategy shifts in ‘real time.’
Going back to the technical breakout in the 10Y, here are some more purely technical observations courtesy of Dana Lyons, who recently had this to say about the 10Y reaching resistance:
Rising Rates (Really) Reaching Resistance
Today’s Chart Of The Day continues our recent run of technical looks at specific price charts, particularly those nearing potential junctures of significance. The past few days it was metals in silver and steel. Today, it is a big one: the 10-Year U.S. Treasury Yield (TNX). The recent spike in yields have spawned a new “rising rates” chorus from among the investment community. Back in June, we suggested that the long-awaited turn higher in yields was perhaps finally a possibility, if only because so many had finally given up on its inevitability. However, even if the long-term cycle is finally turning higher (A LOT more evidence is needed to determine that), the rise will not be a straight line, the past 2 weeks notwithstanding. And the TNX may now be approaching a point of resistance.
Just prior to the election, we suggested that the 30-Year Yield (TYX) might see its rally struggle around the 2.65% level that it was hitting at the time. Well, needless to say the reaction to the election, er, trumped whatever potential chart resistance existed at the time as the TYX rocketed higher. Similarly, the TNX shot higher at a near-record pace and has found itself as high as 2.35% in recent days. That leaves it squarely testing a cluster of potential points of resistance between 2.30%-2.40%.
Included in this cluster of potential resistance are the following:
- 23.6% Fibonacci Retracement of 2007-2016 Decline ~2.28%
- 38.2% Fibonacci Retracement of 2010-2016 Decline ~2.33%
- 61.8% Fibonacci Retracement of 2014-2016 Decline ~2.39%
- The Post-2007 Down Trendline (on a log scale), connecting the 2014 High ~2.37%
All this adds up to possible stiff resistance to the immediate rise in 10-Year Yields. At least it should be much stiffer than the level mentioned in the post on the TYX a few weeks ago. It is certainly the most critical upside test since the late 2013-early 2014 test of the 3.00% level. The post-2007 Down trendline is the most consequential trendline before challenging the post-1987 and, ultimately, the post-1981 trendlines. And as we have said many times, the confluence of Fibonacci Retracements in the same vicinity not only adds layers of potential resistance, it goes a long way toward validating the junctures identified as significant.
If indeed the long-awaited start of a new secular upturn in yields is at hand, this level obviously will not hold permanently. However, it does appear to be compelling enough resistance to at least temporarily halt the recent rise in rates…really.