Yields: Listen to the Charts, Not the Gossip

From the Desk of Ian Culley @IanCulley

Are investors really buying bonds, betting on a squeeze higher?

Perhaps it’s just my Twitter feed. (Or are we calling it "X" now?)

I’m perplexed by the growing chatter around picking the bottom in bonds.

Warning: Picking bottoms is never a good look.

It’s unbecoming, especially when there are zero signs of a reversal. (The same applies to tops.)

I understand the Nasdaq 100 had its best first half – like, ever.

But what does that have to do with yield charts?

Rates continue to rise worldwide.

Here’s a look at Germany, France, Portugal, and US benchmark rates:

All are steadily grinding higher following explosive advances last year. Yet none have decisively resolved to the upside from their respective multi-month ranges. 

The European yields posted year-to-date highs in early March, while the 10-year US Treasury yield reached its year-to-date peak last week.

I continue to monitor developed-market sovereign yields for a sign of a leading upside breakout in global rates. None so far! 

That doesn’t change the undeniable uptrend for yields.

My five-year-old can identify the trend on this chart – and he should! We learn to identify the underlying trend in technical analysis kindergarten. 

We also learn the cornerstone of our discipline: the Dow Theory tenet that markets trend and that trends persist.

That’s why we always err in the direction of the underlying trend. Charles Dow figured that out over 100 years ago. Luckily for us, he shared it with the world.

Any talk of falling rates and bond-buying, while the US 10-year yield holds above 3.25, is glorified gossip. The uptrend for rates remains intact without any signs of a reversal.

But it’s a completely different story if the US benchmark rate undercuts its April pivot low.

I have to see it first. 

If and when rates begin to roll over, then we can have that discussion. It’s a moot point until then.

Betting on lower rates conflicts with everything I’ve been taught and have experienced trading.

Of course, when the data changes, I’ll change with it.

And you’ll be the first to know.

Stay tuned!

Countdown to FOMC

The market is pricing in a pause through Q1 of next year following last month's 25-basis-point hike.

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 August 10, 2023.

Thanks for reading.

As always, be sure to download this week’s Bond Report!