Near-Term U.S. 10-Year Yield Outlook
The market is near its recent high and test of lots of resistance in the 2.15/18% area (bearish trendline and 50% retracement from the Sept high at 2.66%, 38% retracement from the Jan 20-14 high at 3.05%). With the market short term overbought after the surge from the Jan 30th low at 1.64%, this is a potential area to form a top for at least a few weeks. Note too the market remains within a broader period of ranging (argues more choppy versus 1-way action, see longer term below) and US equities are again at new highs (and have failed multiple times over the last few months, another decline would weigh on yield), adding to the potential of at least a near term top. But at this point, the magnitude of such downside is question. Further resistance above the 2.15/18% area is seen at 2.33/35% and the ceiling of the large, bear channel since Jan 2014 (currently at 2.43/48%). Nearby support is seen at 1.90/02% and again that key 1.63/68% area (Jan 30th low, base of the bearish channel from Jan 2014).
- Bottom line: near-term top potentially in place, but magnitude of the downside is a question.
Strategy/position:
With a short-term top seen, want to be short yield and would sell here (currently at 2.08%). Initially stop on a close .02 above that bearish trendline from Sept, but will want to get much more aggressive on nearby weakness given the questions in regards to the downside (to maintain a good overall risk/reward).
Long-Term Outlook
Very long held view of a huge falling wedge since June 2003 continues to unfold. Though wedges are seen as are seen as reversal patterns, they break down into 5 legs and targets declines below that June 2012 low at 1.38% (see in red in weekly chart/2nd chart below), "ideally" to the base of the pattern (currently below 1%). Also, most in the market continue to try calling a bottom in rates despite getting caught off sides numerous times over the last year or 2 and remains a factor in my long held bearish bias (contrary indicator). Note too that a tendency to "fight" reversals (versus quickly jumping on board) is generally a sign of a more significant bottom, and is still not evident. But remember, 1 leg of these patterns will often fail/never reach their "ideal" target and in this case, would view such a "failure" as more likely (simply because of the level of that "text book" target below 1%). Additionally further, longer term downside "pressure" may be more of a continued period of wide ranging lower, versus a huge tumble directly from here. Longer term resistance above the ceiling of that bear channel from Jan 2014 is seen at the ceiling of the wedge (currently at 2.70/75%, above would argue a more major low is already in place.
- Bottom line: further, long term downside pressure remains favored, but the action is more likely to be choppy/rangy.
Strategy/position
With no confirmation of a more major bottom and the action ahead expected to be choppy and countertrend, would stay with the longer term bearish bias that was put in place on Dec 17th at 2.09%.
