Back in October of last year we looked at what I would argue is the single most important chart in all of finance – the chart of the 30-year down trend in 10-year Treasury Note yields (T-Notes).
Here’s where things stood just a little less than a year ago:
The 30-year down trend in long-term interest rates is the single most important trend in all of finance, because a massive amount of the prosperity we’ve experienced over the last 30 years has been driven by increasingly easy access to money.
When this trend changes, everything changes. Here’s where things stand today:
T-Note rates have clearly ticked up over the past year and are currently hugging the down trend line. This is the longest period that we’ve seen rates just above this down trend line for the past 30 years.
What makes this a particularly perilous time for a possibly decisive break above this trend line is the imminent “Great Unwind.”
The Great Unwind is the anticipated unwinding of the current balance sheet of the US Federal Reserve. The Federal Reserve has been buying T-Notes (and other rate-sensitive instruments) ever since the start of the 2008 financial crisis.
The Federal Reserve has built up a massive balance sheet of over $4 trillion of US Treasuries and mortgage-backed securities. The Fed’s buying has been a huge factor in keeping long-term interest rates low.
As the Fed bought T-Notes, the prices of T-Notes went up… and the yields on T-Notes went down.
Now the Fed is planning to sell. This past Wednesday saw the most anticipated Federal Reserve meeting in recent history where Chair Yellen announced the Great Unwind. Many expect that as the Fed sells, rates will rise.
If rates rise decisively, it will be a game-changer. So far, though, the market’s reaction to the Fed announcement has been a real snoozer.
Like them or not, the Fed has been very transparent about their intentions. They don’t want the markets to be surprised by their actions. They delivered exactly what was expected.
Here’s a shorter-term look at T-Note yields using the TradeStops SSI system. T-Note yields turned green late last year and have been trending slightly lower for the past 6 months. Although, they have been rising recently in anticipation of the Fed’s announcement.
Overall, there is a bullish wind behind T-Note yields.
As for T-Note prices (yields go up when prices go down and vice versa) the volume-at-price chart shows T-Note futures sitting just above a strong level of support at 125.
T-Note prices have massive support at about 122. It would take a LOT for T-Note prices to move down below 122… but selling by the Federal Reserve is certainly capable of forcing that move.
The commercial traders are also giving us a strong sell signal on T-Note prices. They’re holding net short positions which, in the past, has signaled a move lower for the price of T-Notes.
Our time-cycle forecast of T-Note prices has been very accurate for the past two years. It predicted the low that occurred in December. Currently, the forecast shows that a move lower into November is the likely path.
So, for T-Note prices, we’ve got big support under current prices. But the Fed selling, the smart-money selling and the bearish time-cycle could be a catalyst for lower T-Note prices.
Lower T-Note prices mean higher interest rates which absolutely could decisively break the 30-year down-trend in long-term interest rates.
I’m cautiously optimistic that the massive support under T-Note prices will keep a lid on T-Note yields. However, the 30-year down-trend in yields is absolutely at a tipping point – and there is plenty of fuel that could push prices down and yields higher in the months to come.
I’ll be keeping a close eye on this trend.
