Yields May Be At or Near Their Peak

Introduction

Bond yields may be near their peak or may have already peaked. If so, and the path of least resistance is down, there are ramifications.

Generally, yields have appreciated off the narrative that the Fed will keep yields "higher for longer" in their battle against inflation. The US10Y traded at a year-to-date low of 3.25% at the beginning of April and ran rampant to over 5% by October, before pulling back since then to trade near 4.88%.

Daily Negative Divergence


Source: www.tradingview.com

Technically, the US 10-year yield, on the daily chart, is showing a negative divergence. This suggests that the upwards momentum in yields is waning. This makes sense when we consider the US 10-year yield's weekly chart.

Weekly Overbought Condition


Source: www.tradingview.com

The US 10-year weekly chart shows that the RSI is above 80 (green rectangle). This is considered an overbought condition and likely places a ceiling on the yield until the overbought condition normalises. Thus, the negative divergence on the daily chart makes sense. I.e., the daily momentum is showing signs of slowing because on a broader basis there is potentially limited upside for the 10- year yield.

Bond Value

At this stage, and after a savage selloff, bonds have potential value. If they are attractive at current levels, demand will foster price increases which in turn will pressure yields. One metric that suggests value is the real US 10-year yield, which is around 2.48%. I.e., the yield is almost 2.5% above the average inflation that is expected over the next 10-years. It has not been this high since December 2008 and is certainly compelling at current levels to bond investors.

Image by Gerd Altmann from Pixabay

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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