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Treasury Yields May Finally Be Moving Beyond the Fed's Control


The yields on multiple points along the Treasury curve are breaking out above short-term resistance levels and seem to have more room to run.

The FOMC left rates unchanged yesterday and basically said that they plan to keep rates "low" until late 2014. What did the market say to that? As of now, it is fair to interpret the market's action as one big "Phooey!" Whether they be downtrend lines or horizontal lines, resistance levels are being broken on the long end of the Treasury yield curve. The move in yields is also clearly having an effect on bonds in general.

Let's take a look at what's happening now…

The 10-year yield is breaking out above a long-term downtrend line and has plenty of room to move yet.

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  • For quite a while now, I've been highlighting the fact that yields refused to confirm the up move in stocks and were possibly signaling more problems to come. Well, no more.
  • Yesterday, the 10-year Treasury Note Yield ($TNX.X) broke out above the downtrend line that had been in place for about a year. Today, there have been no signs of turning back for a test of that line (now support).
  • Using Fibonacci lines, we can extrapolate possible upside targets for this move. If this is still just a corrective move higher, the 100% Fibonacci line at 2.477% will be the upside resistance that holds (that would be wave C of an ABC correction – not labeled as such on the chart).
  • If, on the other hand, we're seeing the beginning of a new secular move higher in rates, the upside targets will be up at 2.737% and/or 2.897% (the 138.2% and 161.8% projection lines for what would be wave 3 – which is how I have the chart labeled currently).
A closer look at the chart of the 10-year yield highlights the breakout in further detail.

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  • The chart above is simply a zoomed-in look at the 10-year T-Note yield. Once again, we see the breakout point highlighted in the green circle.
  • The violence of this move has taken out the shorter-term 100% Fibonacci projection line (bright red lines). Assuming this move holds into the close today, the next short-term upside targets will be 2.287% and possibly 2.354% (wave iii targets).
  • Now, the signals the bond market is sending are not "recession" or "market correction coming." Rather, they are more along the lines of "watch out for inflation" and "get the heck out of Treasuries."
The yield on the 30-year Treasury Note is also breaking out.

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  • The 30-year T-Bond Yield ($TYX.X) broke out and closed above horizontal line resistance at 3.186% yesterday. They, too, have not looked back as of yet.
  • The next resistance level for the 30-year is at 3.446%. However, there certainly appears to be more room above that before "line in the sand" resistance comes into play – in this case it would be the long-term downtrend line.
  • What effect is this move in yields having on bonds in general? Let's take a look…
The iShares Aggregate Bond ETF (AGG) is getting hammered.

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  • The bond market in general is clearly reflecting the move higher in yields in a big way. The chart above of the iShares Aggregate Bond ETF (AGG) shows two very bearish developments:
    • A double top (January peak and late February peak)
    • A convincing break of the long-term uptrend line
  • So, not only are Treasuries going to be ugly, but exposure to diversified bond funds (which include Treasuries, agencies and investment grade bonds) may bring sub-par returns.
Investment-grade bonds had been a great alternative / compliment to Treasuries – no more.

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  • The chart of the iShares Investment Grade Bond ETF (LQD) is shown above. Clearly, we're seeing another major breakdown occurring here.
  • LQD not only broke and closed below the uptrend line (in place since November), but it took out horizontal line support at 115.82.
  • The green boxes on the chart highlight potential support levels for LQD. But, the way yields are acting, they may just be stopping points on the way lower. We'll re-evaluate in the weeks to come.
In currency land, the US Dollar Index may be reflecting the increase in Treasury yields as well.

Click to enlarge
  • The US Dollar Index, even with its heavy weighting in the euro / US dollar cross, is hinting at higher levels to come.
  • How can this be? Isn't the situation in Europe getting better? Apparently not. The DXY appears to be in the early stages of wave C of a bigger-picture ABC correction. If my count is correct, then the DXY could be in for a move up to just under 90 (nearly 10% from current levels – which is huge in currency terms).
  • This move higher in the DXY could clearly be tied to the upward surge in Treasury yields – and all of the economic forces at work that may be pushing those yields higher.
Overall, the big news this week in terms of this report clearly is coming from the bond markets (after weeks / months of very quiet action). As always, the currency and bond markets are the biggest markets in the world – and as such their trading action / messages must be respected.

Twitter: @tttechnalytics

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No positions in stocks mentioned.

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