Where are Treasury yields heading? A technical analysis.

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.

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.

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.

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%.