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After the global stock market correction, investor scrutiny on collapsing U.S. Treasuries has intensified. And with conditions still edgy, it’s little surprise markets are mapping almost any Fed, fiscal or the dollar news against the 40% rise of 10-year yields since September.
Lucky 3%
Their proximity to the ‘psychological’ round number of 3% adds further tension. On Monday, the rate hit 2.885%. It had not been as elevated since January 2014. Whilst hovering in the vicinity, probability that the rate will reach 3% in short order is higher than at any other time since December 2013, when the last 3% print occurred. ‘Psychological’ levels have psychological effects. For one thing, the closer the yield gets to that key level, the more intense the feedback loop between expectations and the yield itself becomes. Momentum could carry the yield well past the 3% marker if volatility takes hold. Possible outcomes of such effects are fresh in the mind.
Hawkish BoE hints as Fed doves appear
It’s also worth keeping an eye on ‘event risk’ for the remainder of the week. Treasurys have already shrugged off a U.S. government spending deal reached overnight that averts another shutdown. China’s lowest dollar trade surplus in a year, out this morning, also caused barely a ripple.
Still, Thursday’s Bank of England statement could emit hawkish sparks that weigh further on gilts and keep global debt under pressure. Fed commentary could pull yields in the other direction. Philly Fed president Harker, speaking later, may reiterate cautions last month that two rate rises might be more 'appropriate' this year than the three pencilled in by most FOMC colleagues. That would echo suggestions by Chicago Fed president Evans, on Wednesday, that the Fed could pause hikes till mid-year. Yields largely shrugged off Evans’ words but may soften on a swift repeat. Commentary from Minneapolis Fed president Kashkari, a known dove, also scheduled Thursday, could have a similar effect.
Near-term technicals
At the time of writing the 10-year yield was at 2.8349%. Still well clear of the 2.611%-2.676% support zone established before last week’s acceleration. Thursday’s high so far is 2.844%, compared to Wednesday’s late-night 2.861% peak. With little traction near Friday’s 2.852% close, that rate looks increasingly like resistance. However, lower highs and higher lows in recent sessions form a ‘pennant’ (flag) continuation pattern. Chart technicians often interpret these as precursors to a near-term vault.
U.S. 10-year Treasury Yield price chart – daily intervals
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