With this morning’s employment report, this morning is a perfect time to update the chart on the yield U.S. 10-year Treasury note. Some of this will be merely be a review of things we’ve highlighted in the past, but given that the yield is getting near its key resistance level again, we think it is important to review the entire picture......The employment report was weaker than expected, BUT the yield has actually moved up this morning. (We’re guessing that the market believes that this number will get Congress to move more quickly on the Covid relief package.)
Ok, let’s look at the chart. First of all, the yield on the 10yr note formed a very nice “base” on its long-term chart during the spring and summer months...by bouncing around in the 0.5%-0.7% range for six months. It did spike up to 0.95% in June for a few days, but immediately rolled back over and fell back within that range. Even though it failed to breakout of that range in June, the fact that it did not drop below that sideways range over the next few months showed that it was still building a nice “base” (and thus not breaking down...and dropping towards zero).
As we moved past Labor Day, the yield on the 10yr note began to rise again...and test the top-end of the above-mentioned range. More recently, it has again broken above that sideways range...but this time, instead of rolling back over very quickly, it has held above the range for the past 4-5 weeks. The fact that it has held above the 0.7% level for several weeks gives it more upside potential...and raises the odds that it will indeed break above those June highs in a meaningful way before long.
Of course, it is important to see a “meaningful” break above the 0.95% level before we can say that a breakout is taking place. Therefore, it will take a move above the round 1.0% to do the trick. We’re not there yet...and, as always, we HAVE to wait for that “meaningful” break before we can get too excited about the development. However there is no question that the “set up” we’ve seen over the past 6-9 months...AND over the past 4-5 weeks...is very constructive for an upside breakout in yields before long.
We believe that a move above 1% would be even more important than most people realize. The most recent rise in rates has also taken the 10yr yield above its trend-line going back more than two years!!! Therefore, not only would the yield be making a very important “higher-high” by breaking above 1.0%, but it would ALSO be breaking above its multi-year trend line...and it would be doing BOTH after forming a nice multi-month “base.” In other words, if (repeat, if) we see a break above 1.0%...one that holds for more than a few days...it will confirm a very important CHANGE IN TREND for long-term interest rates!!!!!
Some people will argue that a change in trend for interest rates will be negative for the broad stock market...while others will say it would be quite bullish. (The majority would probably said it would be bullish.) Either way, it WILL have important implications for interest rate sensitive stocks, so we will be watching how things develop in the Treasury market over the coming days and weeks like a hawk. (More on this issue and its implications in our “Weekly Top 10” piece this weekend.)
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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