2-Year and 10-Year Treasury Yields Near Breakouts as Stocks Face Pressure

Stocks finished the day mostly lower, while rates finished the day mostly higher. The 10-year Treasury yield traded around 4.75%, moving us just that much closer to a potential push toward 5%. This week’s data could help bring the 10-year closer to that 5% level, but then again, a surge in oil could too.

JOLTS and ISM Manufacturing come tomorrow, followed by ADP private payrolls on Wednesday, ISM Services on Thursday, and the jobs report on Friday. The totality of the data this week could potentially spark another move higher in the 10-year, especially given how low the bar is for job creation.

The 10-year looks like a bull flag, and a pretty easily identifiable one, with a projection signaling a move to about 5.1%.

The reason we should care about bond yields is that we are in a regime of negative correlation, meaning that a rise in bond yields tends to lead to a decline in stock prices. The correlation is measured using the daily changes in both rates and stocks. More importantly, the 120-day correlation shows that this relationship has been strengthening.

The 2-year looks particularly vulnerable at this point, as it sits just below resistance near 4.4%. I think a breakout in the 2-year could set it on a path toward around 4.75%.

Semiconductor implied volatility continued to get smashed and probably has further to fall after Broadcom reports results. We have been watching the correlation between semiconductor ETF implied volatility and the VIX move higher in recent days. This has served as a proxy and leading indicator for the implied correlation index, working fairly well. It would seem to suggest that implied correlations have further to climb.

Ultimately, with this week being data-heavy, there is downside risk in the S&P 500, given that the put wall resides around 7,500, implied volatility is likely to rise heading into the jobs report, Treasury yields are rising, and the semiconductor sector continues to look weak. It certainly wouldn’t be a big deal if the index fell to 7,500; it would just push us back to where the index stood on July 31.

-Mike

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Glossary by ChatGPT

120-Day Correlation — A rolling statistical measure showing the strength and direction of the relationship between two variables over the prior 120 trading days.

Bull Flag — A bullish continuation chart pattern characterized by a strong upward move followed by a period of consolidation.

Implied Correlation Index — A measure of the market-implied correlation among individual stocks within an equity index, derived from options pricing.

Implied Volatility — The level of expected future price volatility embedded in options prices.

ISM Manufacturing — A monthly survey-based index measuring U.S. manufacturing-sector activity.

ISM Services — A monthly survey-based index measuring U.S. services-sector activity.

JOLTS — The Job Openings and Labor Turnover Survey, a monthly report tracking U.S. job openings, hires, quits, and separations.

Negative Correlation — A statistical relationship in which two variables tend to move in opposite directions.

Put Wall — A strike price with a significant concentration of put-option positioning that can influence market behavior around that level.

Resistance — A price or yield level where selling pressure has historically been strong enough to impede further advances.

VIX — The Cboe Volatility Index, which measures the options market’s expected 30-day volatility for the S&P 500.

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