Treasury Yields Break Out of Range; Head Toward 1%
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It has been only two weeks since we warned that technical market analysis was signaling that yields on 10-year Treasury notes, rather than edging higher from the 2% level around which they have been bouncing for the last year, were in fact more likely to decline still further than they were to climb. The only question that remained to be answered was what the catalyst might be for such a move.
Now we know the answer to that question. Renewed fears that Spain’s banking system may be teetering on the edge of collapse and that European politicians and policymakers may be unable to craft a solution to the crisis in a timely manner sent panicked investors fleeing to the safe haven of U.S. and German government bonds yesterday, pushing the yields on the 10-year Treasury note down to only 1.619%, a 60-year low. The flight to relatively risk-free assets resumed today, as investors reacted to underwhelming economic data (including a downward revision to first quarter US GDP growth), and began talking about the possibility that Europe’s crisis could be turning into a problem for the US economy as well. The yield on the 10-year note fell to new lows of around 1.532%; yields on the seven-year Treasury note fell beneath the 1% mark for the first time in history.
At these new levels, another pattern for the 10-year Treasury yield is taking shape on technical charts, which showed a “congestion zone” of sorts for the Treasury yield between 1.8% and 2.4%. Before yesterday’s drop, the weekly price action had traced out an “M” pattern, technically a bearish signal for yields that implied they were likely to fall to even lower levels than we have already recorded. The textbook scenario still calls for the 10-year Treasury’s former low yield of 1.8% to become its ceiling, and for the move to the downside to be of roughly the same magnitude as that recorded late last summer before Treasuries stalled in that congestion zone. In other words, the likely total decline from that 1.8% yield may amount to a full percentage point, leaving yields at 0.8%.
En route to that low, however, technical analysis hints that the 10-year Treasury yield may find an interim level that will serve as a temporary halting point. That is based on the difference between the high and low points of its previous range, or 60 basis points. A move 60 basis points below the 1.8% yield would take it to 1.2%, a level at which the 10-year Treasury may find that its rally is interrupted at least temporarily while investors pause to digest the new market realities.
Our longer-term outlook, however, remains that yields are likely to fall below that 1.2% bounce point, to at least 1% if not 0.75%. Yields on Germany’s 2-year government bond are already effectively yielding zero to their investors; the 10-year bund is offering yields of only 1.27%.
It’s clear that in a market environment dominated by fear and uncertainty, investors’ hunger for safe havens will trump their reasoned analysis about whether these yields represent real value or not. And that fear and uncertainty is unlikely to evaporate any time soon. On the horizon are not only the Greek elections, but more imminently, the release of the latest batch of employment data in the United States tomorrow as well as an upcoming auction of Spanish debt next week. We’ll be back to keep you posted on what this means for Treasury yields.
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