10 Year Yield Breaks Resistance – Higher Rates Ahead?

May 29, 2008: 9:55 PM CST

Today, the yield on the 10 Year Note sliced upwards through its declining 200 day moving average, signaling a potential reversal in trend and the possibility of higher rates yet to come.

Daily Chart ($TNX):

After forming a strange sort of double bottom, complete with a positive momentum divergence, the yield, now just under 4.1%, appears headed higher as price has just completed a trend reversal on the daily time-frame and has breached its falling 200 day average (both bullish signs).

The Fed has hinted that it has finished its campaign of lowering interest rates, and the market may already be pricing in this information and the potential for rate hikes in August or afterwards, especially if the economy were to continue to improve.

Rising rates have the effect of stimulating the US Dollar Index, and potentially causing some weakness in the commodity bull markets (including oil and gold, potentially).  One would imagine this development would be relatively good for the broader US Economy and Stock Market.

Higher rates will drive bond prices lower, especially if economic conditions improve and money continues to flow from the bond market into the stock market.

To see the larger picture, let’s glance at the weekly chart:

Not only has price (yields) broken resistance on the daily chart, but on the weekly chart as well, after a positive divergence preceded the recent strong up-swing.

Price has breached the weekly 50 period moving average after rising above the 20 period average, both of which were bullish for yields (subsequently bearish for note prices).

We’ll continue to watch this development with great interest for a variety of reasons, all of which are related to inter-market analysis and the implications for the stock market and other related markets.

2 Comments

2 Responses to “10 Year Yield Breaks Resistance – Higher Rates Ahead?”

  1. Eyal Says:

    Hi,

    The TLT has also started to rollover and I think that any bounce is shortable.

  2. Richard Says:

    Of similar note, the daily chart of the US Treasuries, TLT shows ‘three black crows’ which is a pattern that comes when ever there is a strong market sell off — a ‘run on the US Treasuries’ is well underway that has rewarded, and will continue to reward, those who are invested in the Proshares Bear Treasury Bond ETF, TBT.