10-year Treasury Intraday Yields
For a while, it looked like we wouldn’t breach those levels, but now that we have gone through 2.94%, the big question is, how high can we go, and how quickly can we get there?
10-Year Treasury Intraday Yields
The easy question to answer is on timing -- quickly. Between algos driving much of the market, funds looking for a trend to ride, convexity hedging, and any remaining stop losses, we think we will see 3% quickly.
Our 3.1% target seems to be a likely level to spike to though on our simplistic chart, though 3.2% seems like a better resistance level. We put in the 3.75% line to really get the bears excited, but our call remains a spike through 3% to a little over 3.1%, where we will look to buy.
The spike above 3% will be aided by the media.
Just as “S&P (INDEXSP:.INX) 1,500” or “Dow (INDEXDJX:.DJI) 10,000” or even “IG200” headlines can attract more attention than they deserve, the “10-year Breaks 3%” and “Yields hit Multi-Year Highs” headlines will be in abundance. Those headlines can and do move markets.
It will take great fortitude to buy with those headlines staring you in the face. RIAs and RRs will be fielding calls from investors concerned about rising rates.
It an be argued that they have been fielding those calls for months now, but the volume and intensity and level of concern will increase further. The easy answer is to sell, but it's probably not the right one.
That is how we see the 10-year Treasury playing out.
It might be too premature to discuss the rally since we haven’t even gotten the sell-off yet. It might be just plain stupid to think about timing a bounce, but there are reasons to think that we can see a big rally at some point.
Again we aren’t expecting the move just yet, but look at these charts:
10-year Treasury RSI Since January 2012
We are hitting conditions where yields look overbought (meaning Treasuries are oversold), which has been a consistent little indicator.
Every time we get to overbought, we get a rebound where yields drop. The size and duration of the rallies has been decreasing, which is a bit of a concern, but if we are right that we get a spike to 3.1% in a very short time, the overbought conditions will be extreme. Any sort of simple mean reversion back to any of the moving averages would also imply a pretty extreme move tighter.
As more people pile into the short the 10-year and the hype grows and “mortgage convexity hedging” becomes a dinner party conversation topic, the conditions will be set up for a massive rally.
10-year versus 30-year Treasury Spread
The curve has flattened an incredible amount. While we had argued that curves had been too steep for a long time, it now seems that at least 10s 30s might be getting too flat. We are almost at levels we only saw during the midst of the crisis. With the Fed still seemingly on hold at the front end of the curve, we think you need to get more of a sell-off there, or a rebound in the 10-year point.