US10Y Technicals – Short Term Bearish Trend Developing

Hourly Chart

Treasury yields decreased yesterday, drive by the same risk-off sentiment which drove Stocks lower. However, unlike Stocks, yields quickly rebounded towards the end of the US session as seen from the sharp fall in prices of US10Y. This decline continued during the Asian session, with prices breaking both 124.6 resistance turned support and the rising trendline that has been in play since last Friday. The reaction in Asia was triggered by a report from The Nikkei which said that President Obama “is set to” name Lawrence Summers as the soon to be vacated Fed chairman position. It is interesting to see such bearish reaction in bond prices, as Summers has been the preferred choice by far by market participants due to his supposed willingness to continue quantitative easing compared to the more prudish Janet Yellen who is another runner for the same position. Hence, this report which suggests that Obama may nominate Summers as early as next week should have brought Treasury prices higher, not lower. Furthermore, the legitimacy of the report is in question as well, as it is highly unlikely that a Japanese newspaper manage to get the snoop when your blockbusters like Wall Street Journal or New York Times failed to get insider information such as this.

Regardless, the fact of the matter is that 10Y prices are currently pushing lower towards 124.0. Price is finding some support from the 124.2 level which incidentally was the levels of last Friday and early Monday. Stochastic readings suggest that some slight bullish pullback is imminent with readings pushing forming a trough. However, readings have yet to form a proper bullish signal, and hence do not expect price to clear the closest resistance of 124.4 which happens to be the confluence with the rising trendline right now. However, if price does cross above 124.4/rising trendline together with Stoch curve pushing above 20.0, the likelihood of a full bullish cycle increases, and we could even see prices clearing 124.6 resistance easily should that happen.

That being said, long-term outlook for Treasury prices remains lower due to the inevitable QE tapering. Even if September tapering action does not happen, the same narrative will play again in the final 2 FOMC meeting in October and in December. Hence Treasury prices can be expected to push lower in the long run, with only 123.5 (implied 3% yield) providing strong support against further fall in prices. If yields does breach the 3% mark, we could see prices pushing sharply. Whether this mythical 3% mark will be breached this year still remains to be seen, but with currently extremely close at 2.9+%, any tapering action that comes into fruition will likely nudge yields above the level.

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