This article was published in Business Times’ column “Chart Point” on 5 February 2018.
10-Year Treasury Yield Monthly Chart Source: Bloomberg, PSR
*Red line = 150-month exponential moving average
The 36 years bond bull might be coming to an end soon but only after the 10-year treasury yield breaks above the 2.93% to 3.05% levels. Since 1981, the 10-year treasury yield has been trading at a high of 15.8%. After a prolonged period of zero and negative interest rate policy, the 10-year yield was eventually suppressed to a low of 1.32%. Lately, there has been much chatter about how this bond bull has ended especially on the price action perspective. More specifically, Bill Gross and Ray Dalio declared that the 36 years bond bull has ended.
From the near-term perspective, the 10-year treasury risen a fair bit since October 2017. The most recent surge in the yield was the reason for the market calling the start of the bond bear market as the 10-year treasury yield broke above the much-watched long-term downtrend line since March 1989. Moreover, the recent ascend also took the 10-year yield into a four year high as it broke above the December 2016 high of 2.63%.
However, we believe it is a little premature to call for the end of the bond bull now as the critical threshold for the bond bears is the 150-month moving average (2.93%) and the January 2014 high of 3.05%.
Our study has shown that the 150-month moving average is the dividing line between the long-term bulls and bears. If the yield is above the 150-month moving average, the uptrend is in play, vice versa.
Further significance of the 150-month moving average can be seen by the reaction around it. Since November 1985, the 150-month moving average has been acting as a ceiling on the 10-year yield. Each test of the 150-month moving average was faced with relentless rejection shown by the highlighted boxes. In total, there were five occasions where the 10-year yield impeccably resisted the ascend and thus keeping the bond bull alive.
More importantly, when the yield gets near the 150-month moving average, if there is an opposite close in yield to the other side of the moving average, then a reversal in trend might be happening. For example, for the whole period of 1963 to 1985, the 10-year yield was moving in an uptrend. The trend reversed after the yield broke and closed below the 150-month moving average in October 1985 shown by point 1 in the chart. Since then, we have witnessed a raging bond bull market taking yield down from 10% to 1.32%.
We might be seeing a similar pattern playing out again but this time on the opposite side. For this bond bull to end, the 10-year yield needs to close above the 150-month moving average (2.93%) significantly on a monthly basis to shift the sentiment around greatly. Further confirmation of the bond bear will be apparent once the yield breaks above the January 2014 high of 3.05%.
On the flip side, if the 150-month moving average and 3.05% resistance continues to cap the bullish ascend, then the bond bull could sustain.
Hence, in summary, the fate of the bond bull lies on the 150-month moving average (2.93%) and 3.05% resistance area. Watch that area closely to see if the yield manages to close above the critical dividing line or not. Based on the Commitment of Traders (COT) reports, there might be limited upside left in the 10-year yield as the masses crowd into shorting the bonds. Short squeeze tends to happen once the net non-commercial combined positions exceed 100,000 contracts which is currently happening. The 3.05% threshold in the 10-year treasury should hold in the near-term keeping the long-term bond bull intact.