Ten Year Note Yield and the Yield Curve April 19

Apr 19, 2011: 11:02 AM CST

With the recent talk of US debt, traders have been discussing Treasury Yields and the potential for skyrocketing yields if the AAA Rating of the United States should ever be reduced a rank.

Nevertheless, let’s take an updated look at the current 10-Year Treasury Note Yield and then pull the perspective back to what the current “Yield Curve” says about the state of affairs at this moment.

First, the 10-Year Treasury Note Yield Chart:

First things first, the 10-Year Treasury Yield is strongly positively correlated with US Equities (stocks) in terms of chart structure (shape) and index movement.  That’s the first thing to keep in mind.

Second, Yields – like stocks – have been in a sideways “holding” or consolidation pattern starting in December, with current boundaries at 3.60% and 3.30%.

This corresponds with the critical short-term boundaries in the S&P 500 of 1,340 and 1,300 – again, similar in structure.

Also like stocks, Yields peaked so far in February with a clear negative momentum divergence ahead of a sharp decline (the “Japan situation”), which takes us currently back to the 3.60% area as resistance has taken yield back down to the 3.30% support line (just like our recent stock pullback to 1,300).

For the moment, “All is Well” in the Yield/Stock Relationship with no surprises.

The monkey wrench in the process that would strongly disrupt this relationship would happen if serious fears of actual US defaulting on debt obligations, which would likely send both stocks and bond prices plunging (and thus Bond/Note Yields surging).

Despite the negative news from the S&P agency, a surge UP in bond yields yesterday or today has NOT happened yet – despite the early morning volatility on Monday.

So as long as yields and stocks continue to move together – and by proxy stocks and bond prices move in opposing directions – all is well.

The big deal will be how the US Congress compromises/sacrifices on extending the debt ceiling in late May or June, but that’s a future bridge to cross when the debate actually begins.

Carefully watch the positive relationship between Treasury Yields and Stock Prices for any major disruption.

Moving on, here is the current “Steep” Yield Curve as viewed from StockCharts.com:

Two quick facts:

1.  Short-Term Yields are significantly below Long-Term Yields which tends to bode well for a continuing economic recovery.

2.  Yields of all maturities have declined slightly over the last month.

The green shadow lines reflect where yields WERE over the last few weeks and that they have all moved slightly down.  The rising black line is the current “Yield Curve” and is deemed officially “Steep.”

The Yield Curve tends to “Invert” at stock market peaks just ahead of recessions – meaning short-term yields are equal to, or greater than, long-term yields (in a tight monetary policy).

So for the meantime, the relationship between stocks and bond/note yield remains strongly positive, and the Yield Curve remains clearly “steep.”

It takes many months to change the Yield Curve, and the Federal Reserve has signaled no interest whatsoever in raising short-term rates any time soon, so expect the Yield Curve to remain the same unless serious fears of a US Default take-hold across the markets.

Otherwise, keep watching the positive relationship (what happens to one happens to the other) in the Stock Market and Treasury Yields for any sign of breaking.

Absent any significant change in the relationship (or Yield Curve), things should continue ‘as normal.’

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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4 Comments

4 Responses to “Ten Year Note Yield and the Yield Curve April 19”

  1. 10 year bond rates in a range « SL Trading Group Says:

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  2. The Big Guava Says:

    you think we might be looking at a possible head-and-shoulders pattern on that $TNX chart with the left shoulder being the 3.6% swing high in Dec, the head the spike in Feb to 3.7% and the right shoulder the 3.6% high this month?

  3. Tprovan Says:

    Hi just a thought but with a new pivot high it should be in an uptrend for now. the 2nd right shoulder high would have been lower, as far as I know,
    what is your thought Corey using the pure price method from your book?

  4. Tprovan Says:

    Hi if bond yields go the same way as the market and if there was a big drop in the market with money being pulled out eg a yield curve inversion
    would it then be a good idea to watch for money to go to bond market.
    Bomd prices up yields down buy the tbt 2x bond yield inverse?