U.S.10 Year: Long Term Outlook Remains Bearish

It was interesting to see US10Y prices climbing yesterday even though stock markets traded lower on supposed QE tapering fears. If indeed stock tapering fears were the main driver for yesterday’s stock decline, we should have seen the same fear driving US10Y prices lower instead. Judging by what we saw yesterday, stocks lower and Treasuries higher, this is a classic “risk aversion” move where demand for safe assets such as government backed debt increases while higher risk stocks are dumped.

What is the driver for this risk aversion? The only “major” news yesterday was the US Market Flash PMI which declined to 52.8 from 53.1 for the month of September – the second drop in a row. However, it is unlikely that the market was reacting bearishly to the news, since the immediate price action when the news was released was muted. Perhaps there is just a difference in opinion between Stocks and Fixed Income traders, and in this case the Fixed Income traders are not as worried about a QE tapering event in October as are stock traders.

And why should they? Looking at prices (see weekly chart), we can tell that US10Y has already suffered a huge setback since May, driven by market participants pricing in an eventual tapering event. Hence even if a tapering event occurs, it is unlikely that prices will be able to drop much more. Furthermore, with a clear 3% implied yield (around 124.0 in terms of price) acting as resistance, bulls can afford to enter long with a clear exit plan in mind (e.g. should price breaches 124.0 or above 3% implied yield). This is unlike stocks where prices have been printing higher historical highs, and may receive a huge impairment should a QE taper event occur.

Hourly Chart

From a technical perspective, overall bullish pressure remains intact, but prices will need to clear the 126.75 resistance in order to reestablish bullish conviction. It is also possible that bullish acceleration will occur should the breach happen as we’ll not only be breaking the flat line but also the rising Channel Top. Stochastic readings are currently reversing back up after showing a bearish cycle signal, which is a good sign for the bulls. If we trade higher from here, Stoch readings will most likely push above 80.0 and invalidate the bearish signal which exposes Channel Bottom as immediate bearish target.

Daily Chart

The Daily Chart is less bullish though, with 127.0 resistance continuing to exert bearish pressure downward. Stochastic readings are also oversold, lending strength to the resistance. However, this does not constitute evidence that price will move lower from here. Instead, a move lower will only be confirmed if 126.0 is broken and coinciding with Stoch levels pushing below 80.0. Right now, a retest of 127.0 cannot be ruled out especially given short-term bullish pressure.

That being said, the long term outlook for Treasuries remain lower as QE tapering is expected in 2014 if not in 2013. Even if the Fed announces that QE will last forever, prices will still fall as yields will naturally increase due to strong risk appetite. Hence, it remains to be seen whether 10Y prices will be able to soar back above 130.0. From a technical perspective, 128.0 will provide immediate bearish pressure if 127.0 is broken. Hence it will be premature to think that this bullish momentum will last the mile when further technical and fundamental tests awaits in the not so distant future.

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