From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Last week, we touched on the weakness that’s been developing further out on the yield curve.
The long end simply hasn’t kept pace with shorter-term yields. This is understandable given the magnitude of the move in the 30-year since summer 2020. At some point, the shorter end of the curve needs to play catch up. And it’s done just that these past couple months.
Now it’s time to focus on longer-term rates, as further downside pressure will eventually put the current economic recovery into question.
Let’s put the recent action in rates into perspective as we head into year’s end.
Below is a chart of the US 30-year yield:
After testing a key level of former support turned resistance around 2.23, it’s slipped back toward its summer lows.
If the 30-year yield continues to fall and takes out its former lows around 1.78 that does not bode well for the reflation and economic growth narratives.
What are the other areas of the yield curve doing?
Let’s take a look.
Here’s an updated version of a chart we shared last week, showing the 30-, 10- and 5-year yields:
We pointed out that the 5- and 10-year continued to make higher highs and higher lows, while the 30-year was trending lower.
But when we update the chart and focus on the latest action, we’re seeing rates turn lower across the board. Notice how the 30-year peaked early last month, and the 10- and 5-year peaked almost two weeks later. The long end of the curve is leading, so we’re watching the 30-year as it should be the first shoe to drop.
Are these just standard throwbacks in an ongoing uptrend?
Or is the long end of the curve telling us something?
We’ll just have to wait and see. If long-duration rates continue to catch lower it eventually raises the question as to just how well the global economy is doing. If market participants are expecting economic growth and prosperity, we'd expect the long end of the curve to be trending higher, not lower.
The line in the sand for the 30-year is 1.78%, and it's defending it for now. If we violate those summer lows, we'll be on the lookout for further signs of deterioration.
