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The era of improbably low interest rates may be coming to an end, at least for a while. From short-term Treasury notes to long-term bonds, technicals are pointing to a rebound in yields and a dip in prices.
While stocks plunged in July and August, prices for Treasury securities soared as investors ran to the perceived safety of Uncle Sam. On Aug. 18, when the stock market had a particularly bad day, the yield on the benchmark 10-year Treasury note dipped temporarily below 2%. Making the fall below that key psychological mark all the more incongruous is that it came just days after Standard & Poor's knocked down the country's credit rating.
Clearly, huge swings in stock prices, along with mounting evidence of economic slowing in the U.S. and abroad, plus the continued deterioration of the European sovereign debt situation, sent investors fleeing risk in favor of the safety of U.S. government securities.
But since setting their record, the benchmark 10-year Treasury note's yield has started to inch higher (see Chart 1.) The chart shows several interesting items that point to higher interest-rate levels in the near-term, starting with the action surrounding the Aug. 18 low itself. After setting their intraday record, yields rebounded to close near their highest levels of the day.
10-Year Treasury Yield
Followers of Japanese candlestick analysis labeled the action a "hammer" and it leans bullish (in terms of higher yields, which are bearish for bond prices.) This candle pattern gets its name as the market is supposedly "hammering out a bottom." If the chart continues higher, the signal is confirmed and indeed yields did move higher five out of the last seven trading days.
Momentum indicators, such as the relative-strength index, add fuel to the rising-yields argument as they were moving higher as yields made lower lows. In charting parlance, this is a bullish divergence between trading and the indicator it is trading -- yields, in this case --that usually changes direction to follow the indicator.
If we step back from complex technical formulas and jargon, we can still get a sense that yields dropped very quickly to levels that were out of line with recent history. This is not to ignore the current low-interest-rate policies of the Federal Reserve but rather to point out that the market took all information available and perhaps overshot its downside goals.
In fact, even at their current 2.28%, 10-year yields have not been this far below their 50-day average since December 2008 during the height of the financial crisis. Even if there is still a slew of fundamental and economic arguments why rates should stay low, the technicals indicate they should move higher to at least revert closer to their mean.
If we measure the size of the range in which yields have moved over the past three weeks and project that value from its upper border, we get a target of 2.63%. That is very close to the 50-day average now sitting at 2.69%. While it would not result in a major technical breakout to the upside it would take rates back from a low level that has not persisted for more than a few weeks each time it was reached.
Some will argue that this will also mark a return towards a more welcoming attitude toward risk. Indeed, high yield, or junk, bonds are making an opposite move. Yields on this sector are falling as prices are rising.
The price of the SPDR Barclays High Yield Bond exchange-traded fund (Ticker: JNK) has been on the move higher for most of the month, although it has been a choppy move (see Chart 2).
SPDR Barclays High Yield Bond exchange-traded fund
What is striking about the chart is that over the past year it looks very similar to that of the Standard & Poor's 500. But that also means there is a stiff price ceiling overhead at about 38.75, only a half point above Monday's trading.
I do not think that either market -- Treasury or junk bonds -- is making a long-term move at this time. But both seem to be returning to levels seen just before the markets panicked in July. Once they get there, we'll have to see whether this latest move was a correction of the previous panic or the beginnings of a major move. In any case, if you're thinking about refinancing your mortgage, you should move quickly and lock in the interest rate before it moves higher.
Getting Technical Mailbag:Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Comments? E-mail us at online.editors@barrons.com
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