Treasury Yield Breakout Signals The Potential For More Upside

It was a bloodbath in bond markets today, with Treasury yields rising sharply. The 10-year yield jumped 12 bps to 4.97%, just 3 bps shy of the 5% level I’ve been talking about for a long time. With the yield trading above its upper Bollinger Band and the RSI well above 70, I wouldn’t be surprised to see some consolidation or even a pullback after tomorrow’s CPI report.

If the 10-year yield breaks above the November 2023 highs near 5.02%, we could be looking at 5.25% as the next potential stop. The chart looks like a large symmetrical triangle or bull pennant, which could point to a move well beyond 5.25% further down the road.

The 30-year yield moved above 5.35% today and, as noted previously, appears to be forming a giant ascending triangle, another bullish pattern suggesting yields could move higher. With resistance now broken, the weekly chart points to the next resistance level around 5.55%.

The 2-year yield rose 15 bps today to 4.58%, and I see 4.80% as the next potential stop, with little resistance between here and that level. I could see the 2-year not only trading at 5%, but potentially above 5%, because the Fed will have no choice but to raise rates and take back all of last year’s cuts. Unless we start to see financial conditions start to tighten on their own.

Speaking of financial conditions tightening on their own, HYG’s dividend-adjusted chart looks almost identical to the S&P 500’s. What stands out today is that HYG broke below a rising wedge, probably the last thing equity investors want to see at this point. If rising Treasury yields start to take a real toll on high-yield bonds and credit spreads begin to widen, equity investors could start feeling the pain the bond market is already experiencing.

Anyway, see you over the weekend

-Mike

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Glossary by ChatGPT

Ascending Triangle — A bullish chart pattern characterized by rising lows against a relatively flat resistance level, often signaling a potential upside breakout.

Bollinger Band — A technical indicator consisting of a moving average and volatility-based upper and lower bands used to identify potentially extended price or yield movements.

bps — Basis points, with one basis point equal to 0.01 percentage point and 100 basis points equal to one percentage point.

Bull Pennant — A bullish continuation pattern in which a sharp advance is followed by a brief period of converging consolidation before a potential move higher.

Credit Spreads — The yield difference between credit-sensitive bonds and comparable government securities, commonly used to gauge perceived credit risk and financial conditions.

Dividend-Adjusted Chart — A price chart adjusted to account for dividend distributions so that historical performance reflects the economic effect of those payments.

Financial Conditions — The combined influence of interest rates, credit spreads, asset prices, lending standards, and other financial variables on the availability and cost of financing.

HYG — The ticker symbol for the iShares iBoxx $ High Yield Corporate Bond ETF, which tracks U.S. dollar-denominated high-yield corporate bonds.

Rising Wedge — A technical chart pattern formed by converging upward-sloping trendlines that is often interpreted as a bearish reversal or continuation signal when price breaks lower.

RSI — Relative Strength Index, a momentum oscillator ranging from 0 to 100 that is commonly used to identify overbought or oversold market conditions.

Symmetrical Triangle — A consolidation pattern formed by converging descending resistance and ascending support lines that can precede a breakout in either direction.

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