The US 10 year yield has run rampant for seven weeks and is currently at 2.86%. Moreover, we note that the swiftness and magnitude of the run has the RSI over 80 (closer to 90), which is overbought (green rectangle). Thus, a pullback in yield as the indicator normalises would not be unexpected. However, if this does happen, it is likely to be positive for stocks.
The US30 daily chart has already moved into its bullish area, between the upper blue and red bands. This bullishness may be in anticipation of a yield pullback and due to Q1 earnings, which have generally been better than forecasts. The Bollinger bands have squeezed (green rectangle), implying that volatility may expand, and if the US30 maintains its zonal position, it is likely to be to the upside.
We caution that yields are still trending up over the longer-term trend. I.e. If the current yield does pullback, and its RSI normalises, it is likely to be due to a short-term peak. Therefore, the stock market may still face headwinds in the medium to longer term.
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.