Interest Rates Also Like Living Dangerously

With Wednesday's big move in bonds, I think now is a good time to review the 10-year yield. This 2.7% level has been my line in the sand for months. I still believe that if yields fall below that area, there is probably a lot more downside to go.

The chart is pretty clear. We're looking at resistance from early July and again in early August. After it broke out, that level became support in late August. Now we're back here again. But with the most recent highs in rates, momentum was already rolling over. That bearish divergence suggests that a sustainable break below 2.7% is likely:

I included some fibonacci retracements for potential support if rates do indeed break down. The 38.2% retracement coincides with the July lows. So 2.46% looks like a decent area for a bounce. And then somewhere around 2.1-2.2% would be a logical area for support as there was some churning in that area in May and June.

All of this would be extremely positive for bond prices, which are putting in a nice bottom themselves. And everybody hates bonds. We haven't seen this much hatred for the asset class since early 2011, just before a 25% rally in 30-yr futures and 40% rally in the iShares 20+ Year Treasury Bond ETF $TLT. Here is what the Consensus Inc. Bullish % chart looks like. Talk about extremes in pessimism:

Source:

Consneuss Bond Bullish Percentage (SentimentTrader)

Tags: $ZB_F $ZN_F $TLT $TNX $TBT