Where are Treasury yields heading? A technical analysis.

Where are Treasury yields heading? A technical analysis.

Bonds
strats-Althea-88x88
Althea Spinozzi

Senior Fixed Income Strategist

Summary:  Ten-year US Treasuries yields may rise fast towards 1.5% once they break above their upper trendline at 1.22%. When we compare 10-year Treasury yields to the 10-year Breakeven rate, we find that there is a mismatch between the two. Either inflation expectations are too high, or 10-year yields lag the breakeven by 100 basis points, giving more context to a substantial selloff. On the other hand, 30-year Treasury yields are not as far away from inflation expectations, but there is potential for them to rise to 2.4% in yield.


Last week 10- and 30-year yields hit a new high since February 2020. The fear for inflation to surprise on the upside is a concern that started to push US Treasury yields higher since Biden won the November election. However, which yield levels should we watch out for?

Starting from the 10-year yields, we see that they have been trading in a downtrend channel for decades. Interestingly, a horizontal line around 1.5% has served as support since 2012. That horizontal line was broken in February last year amid the Covid-19 pandemic. Now it serves as a resistance level if yields break and sustain trading above 1.22%.

15_02_2021_AS3
Source: Bloomberg.

As we take a closer look, we see that although 10-year yields closed last week at 1.2%, they failed to break above their horizontal resistance line at 1.22%. We are now facing two scenarios: either yields break and sustain trading above 1.22%, or they will fall to try the lower trendline of the channel they have been trading since August 2020. Suppose 10-year yields break above the 1.22% resistance line. In that case, yields might rise fast towards 1.5%. Yet, as highlighted above, the 1.5% level is a strong resistance level, giving the market some respite after the selloff in Treasuries. A strong auction of TIPS this Thursday and retail sales numbers can be catalysts for such selloff. Additionally, if yields sustain trading above 1.22% a catch-up effect can trigger bond future stops causing a fast rise to 1.5% in yield.

15_02_2021_AS4
Source: Bloomberg.

When comparing 10-year yields to the 10-year Breakeven rate, it looks that the selloff in Treasuries can be even more significant than what we discussed above. Indeed, the difference between the 10-year Breakeven rate and 10-year Treasury yields is around 100 basis points -the highest in twenty years. It means that either inflation expectations are too high, or 10-year Treasury yields are too low and will need to rise by 100bp to catch up with it.

15_02_2021_AS5
Source: Bloomberg.

Although 30-year yields are also trading below the 30-year breakeven rate, it is essential to note that the spread between the two of them is only of 15bps. It means that 10-year Treasuries are significantly more overpriced compared to their 30-year peers.

15_02_2021_AS6
Source: Bloomberg.

As per the image below, thirty-year Treasuries have also hit a milestone last week, hitting 2% in yield for the first time in a year. If they sustain above this level and break above the channel, they have been trading in since August they will find support next around 2.4%. Otherwise, they would fall to test resistance on their lower horizontal line at 1.75%.

15_02_2021_AS7
Source: Bloomberg.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.