Interest Rates: Don’t Fight the Trend

From the Desk of Ian Culley @IanCulley

US interest rates have churned within a tight range for months. 

Remember: Sideways is a trend. 

While intermarket evidence suggests a breakdown in yields, they simply refuse to roll over.

It makes perfect sense when we zoom out…

Rates are in a well-defined structural uptrend!

Check out the US 30-year Treasury yield overlaid with live cattle futures:

They look almost identical as both exhibit the classic base-on-base formation – one upside resolution followed by another.

To be clear, I’m not proposing a grand thesis regarding a strong positive correlation between long-duration rates and live cattle futures, or what the next directional move in live cattle and rates mean for AI stocks (though I haven’t dismissed the idea).

Instead, I’m simply observing the trend that began in early 2020. 

I chose to place live cattle futures on the chart for effect – a reminder.

Trends persist.

Let’s be honest. If the chart of the 30-year Treasury yield represented a risk asset – your pick – would you have a bullish outlook?

I would! I'd set my alerts and stop orders to catch a potential break to fresh highs and, ultimately, the next leg higher.

Yes, intermarket ratios and cyclical assets have implied lower rates for over a year. Yet the uptrend survives.

I’ve chosen to highlight the mounting evidence supporting lower yields in recent weeks, hoping to catch the eventual decline.

But when I focus solely on the yield charts, I’m more inclined to err on the side of the underlying trend. 

And the structural trend remains undeniably higher until the charts prove otherwise.

Stay tuned!

Countdown to FOMC

The market is now pricing in a pause at this month's meeting.

Here are the target rate probabilities based on fed funds futures:

Click the table to enlarge the view.

This data is from the CME FedWatch Tool as of June 1, 2023.

Thanks for reading. As always, be sure to download this week’s Bond Report!