Yield InversionReally strange market, the yield inversion continues to grow. This site actually allows price calculations, this is 10Y yield minus 2Y yield.
Stock market still acting bullish, but I'm not feeling it.
US10Y trade ideas
US Government Bonds 10YR Yield LONGUS Government Bonds 10YR Yield. Time-frame = 1 month. In 2005-2007 (red circle) - a double top was built (determined automatically by my script) from which the downward movement began for further accumulation. 2009-2019 (green rectangle) - long-term accumulation (balance). 2019-2022 (blue circle) - responsive activity (long entry by key players). 2022-2023 long to the upper limit of the balance. The last 3 months - a retest to one of the key balance levels. 2023 - expect further upward movement towards the 5.000% area (towards the upper border of the double top)
US 10-year yields could test 4% after breaking out of wedgeFollowing the blowout non-farm payrolls number (Feb 3rd), 10-year yields enjoyed a productive week, confirming a minor base in the 3.33% area ahead of a falling diagonal breakout. This has the 10-year poised to re-test 3.90% with possible room to test the psychological 4% region. Look for over-stretched daily indicators to limit potential upside after Tuesday's US Inflation report. That said, a hotter CPI print could trigger a move to 4% easily! At that point, 3.90% would likely become support for a long-term target of 4.25% to 4.35%. If, however, the 3.90% region proves to be more resistant than expected or perhaps isn't even tested, then the 3.58% to 3.40% area will largely determine whether US 10-year yields are continuing to trend higher.
Sell ZN (10-year futures) @ spot (112'22) or Buy ETF TBT @ 30
Target: ZN 112 (1st) 110 (2nd) TBT 32.67 (1st) 40 (2nd) target***
Stop: ZN 114 TBT 28.13
Yield inversion vs SPX - We are building a baseSPX goes up as the yield inversion builds a base and starts rising.
Best time to sell at the top is when yield curve starts curving up.
The key is looking at the RSI levels.
For DOT COM bubble + financial crisis, RSI started going up. Clear bullish divergence.
US10Y : Comparison with the EFFRThese last few days have seen bond yield rising. It is as a direct result of the recent 25bps rate hike.
If you look at the chart above, which is the US10Y less the EFFR, it seems the difference had reached the MAXIMUM based on historical results. Which means to say, the US10Y had already reached the MAXIMUM. From now on, any rise would be in lockstep with the amount of future potential rate hike.
We can also see that once the above difference reached its historical low, the next question that arise is when the Fed will start to PIVOT and cut rates. If you look at 2007, it can actually take some time.
P/S : As always, do not just believe what I say. Use your common sense.
What Makes this Yield Curve Inversion so Different?An Inverted yield curve in the context of a 2% inflation environment holds a different meaning than, an Inverted Yield Curve in a high inflation environment......
Market Expectations of Disinflation led to this Inverted Yield Curve:
The Nominal Inversion of the yield curve is caused by the expectation that inflation will fall steadily. Believe it or not an Inverted Yield Curve is the best case scenario for the Fed. A Nominal Inversion during a high inflation period shows that markets have confidence/belief in the Fed's Policy to bring inflation down to 2%. Most of the inversion seen in the yield curve today is nominal....
The Nominal Yield Curve vs. the Real Yield Curve:
Nominal Yield – Real Yield = Breakeven Inflation Rate.
Real Yield = Nominal Yield - Breakeven Inflation Rate
The Breakeven Inflation Rate represents what inflation would have to be in order for investors to “break even” when buying a bond. The general thought process is: If you believe the inflation rate will be greater than the breakeven rate buy Treasury Inflation-Protected (TIP) bonds.
Notice how the Yield Curve for Nominal Yields is a lot more Inverted than the Yield Curve for Real Yields. Hence, the inversion in today's Yield Curve is mainly nominal. Below I calculate out the Real Yield for the treasuries with Breakeven TIP Data from FRB St.Louis.
Nominal Break-even
US02Y: 4.3% - (RealYield) = 3.0% = 1.3% RealYield for US02Y
US05Y: 3.6% - (RealYield) = 2.3% = 1.3% RealYield for US05Y
US07Y: 3.6% - (RealYield) = 2.4% = 1.2% RealYield for US07Y
US10Y: 3.4% - (RealYield) = 2.2% = 1.2% RealYield for US10Y
US10Y/US02Y Nominal Yield Curve: 3.4% - 4.3% = -0.8% (Inverted)
US10Y/US02Y Real Yield Curve: 1.2% - 1.3% = -0.1% (Inverted)
The bond market expects for inflation to remain above trend the next 1-2 years and decrease dramatically after that. As you can see, the nominal yield curve is very inverted even though, the real interest rate is pretty much held constant across thee curve. The Real Interest Rate remains between 1.3% and 1.2%. The Yield Curve Inversion in Nominal terms is: -0.8% and in Real Terms is: -0.1%.
Partners in Crime: Unemployment and the Yield Curve:
When consumers start to save more, companies start to see earnings deteriorate. In turn, they cut costs by letting workers go. The US10Y/US02Y yield curve is a proxy for Unemployment. Unemployment rises as, the market starts to expect rate cuts from the fed. It is only when the spread on the US10Y/US02Y starts trending up does unemployment start to rise. The spread of the US10Y/US02Y yield curve starts to trend upwards when the 2 year rate plummets as, markets start to price in a recession. Currently, the Yield Curve is still declining signaling that unemployment will remain low.
So what does this all mean???
A recession is not as close as many people are saying. People have been calling for a recession since April. This yield curve also signifies that markets are more or less believe that the fed will engineer a soft anding and bring inflation back to the 2% target. If you don't believe the disinflationary narrative spread by the fed there is an opportunity for you to make money on what markets are mispricing.
What will you do the next time a fake guru waves an inverted yield curve in your face to scare you into a subscription?
US 10 YR Yield vs SPX hit a resistance that started other bottomZoom out and in Oct US 10 Year yields hit a supply level from Dec 2018 which started that big rally, we rejected hard from that in Oct. Now heading into resistance on shorter timeframes that started the other two major equities bottoms. If this rejects here which I think it can that will keep the rally continuing.
10Y US bond Yield at important junctureNear important Trend resistance and 200 MA, if passed it could trigger sell-off sentiment on equity markets
www.tradingview.com
Yields may be set for a big pullback.I think the supports in this broke already. We may just be in a little range here before we see it starting to make a bigger pullback. Can easily get to at least the 76 of the last upswing.
US 10 year yield formation relative to SPXThe US10Y is forming an interesting pattern that suggests a move higher is likely. I decided to compare the general trend movement to that of SPX. The green arrows represent my future base case. However, should the US10Y break to the upside of its current pattern now, the blue arrows represent that. The future picture is always fuzzy, but I’m estimating US10Y is around 4.5% and SPX around 3580 in March/April.
US10Y: Short the next spikeFamiliar pattern for the US10Y as with the support of the 4H MA200 it is repeating the mid December +13.50% rise. In perfect symmetry a new +13.50% rise tops on the Resistance provided by the first Lower High of the down leg, same as the November 13th Lower High.
The 1D technicals have just come out of neutrality (RSI = 57.935, MACD = 0.009, ADX = 33.193) and an additional short trigger will be the next time the 4H RSI turns overbought above 75.00. Our short term target is right above the Support (TP = 3.340%).
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UNITED STATES 10 YEAR TREASURY BONDS. WAVE COUNTA s per the monthly technical analysis, the bonds have offered a nice rally to the upside. The bonds started to pullback causing weakness in the DXY index. The pull back hints further downside to fib 38.2% or 50% for wave 4 before we see further upside. @005fxacademy.
US10Y Sell this rally.The US10Y is breaking above the first Falling Resistance after making a Double Bottom on the 1day MA200. Wait for the right level to sell this rally near the second Falling Resistance. Target the bottom of the Falling Wedge.
Follow us, like the idea and leave a comment below!!
US10Y, risk is off.US10Y/1D
Hello traders, welcome back to another market breakdown.
Reversed US 10 years bonds has been trading in a deep pull-back. The price has started showing some signs of strong bulls, which means that the market might need to price in for higher intrest rates. Aka. Risk is off.
Tarde safe,
Tarder Leo.
US 10Y Government Bond Initial Weekly Analysis I think it is a great idea at this time to see how the bond market is looking with all the talk about the debt ceiling crisis. It will also give us an idea of where the US dollar can go! Currently, the price action has been rolling over to the downside. I think it best to keep that narrative until we see a conformational move that would change this higher timeframe trend. In my opinion, the most important area that I believe has many traders are focused on is the closet supply area which is also the previous higher low. Evetually, this instrument will liquidate the sellers in this market. Lets keep this one on the list and update throughout the week.
Feel free to connect and chat about this instrument. :-)
The Final Nail in the Coffin for GoldThe final key bearish case I have for gold is real interest rates using the 10 year yield and subtracting core inflation. Historically gold was the must bullish when real rates are negative ( like they are now ), but when real rates went back to positive the marked the top for gold with a large correction. With inflation contracting substantially we should see real positive rates by the summer.
Even if the yield curve REVERTS and long end of treasury yields
Even if the yield curve REVERTS and long end of treasury yields rise, we still got some time left for the equities to run higher before #economy falls into #recession.
The "REVERT" in 10-2 Spread always led the spike in #unemployment for 6m~1yr. Check out the chart below.
The Good, the Bad and the Ugly YieldsI have this question... Why are high yields bad? What is bad?
We are in a period of big changes. There are lot's of balances changing, one of them is money. We have just passed (?) the biggest monetary experiment ever (QE) and we are about to enter the successor to that experiment, digital money. Digital money conveniently came about just at the time when hyperinflation became an expected reality. If you talked about hyperinflation 4 years ago, you were crazy, now it is expected (and perhaps actually coming).
... Instinct tells us that the unknown is a threat, rather than an opportunity. Instinct slyly and covertly compels us away from change and progress. ...
-Dr. Breen
In the center of the stages is the paradigm shift in yields. After decades of consistently lower yields, now we are expecting consistently higher ones. Many (including me) have prejudged themselves into be lie ving that high yields are inherently bad.
I cannot conclude into what high yields are bad at. The title suggests that they have 3 faces, good bad and ugly. I can conclude that now, like always throughout history, we are rolling in a cycle.
Some things have changed in unpredictable ways. This unorthodox chart shows us that this year, we have lived through something unique. Perhaps this will be the way things move forward.
From the charts above I have tried hard to conclude into something. The only thing I have learned is the following:
Bonds are the new equities.
In QE world, lower yields made more money. How? Money printing and borrowing needs low yields for it to be popular. Immense liquidity bubbled everything and productivity skyrocketed. QE is the fuel of globalism. Equities paid out dividends, so higher equities led to even more money.
In QT world, higher yields make more money. How? Money burning and lending needs high yields for it to be profitable. Money makes more money, and every day it makes even more money. Commodity producers (GOLD*PPIACO as an example) and wealthy individuals/corporations/nations can enjoy this new era. QT is the fuel of war. Everything is precious and everyone fights for it.
In a globalized world, you could make money by being an intermediate entity. Now to make money you must actually own the resources and money. Rich get richer, and poor get poorer.
This is the purchasing power of the consumer dollar. Poor get poorer...
Poor get poorer when rich get richer.
These charts above are simple to understand and analyze. Down below I will add some of my favorite charts. These charts calculate the value of commodities compared to equities or money supply.
Commodity production bull-flags against equities.
Commodity production bull-flags against money supply itself.
The bull flag is against yields as well.
True Production Cost (PPIACO*yields) is bull-flagging (?)
PPIACO is used as a historical alternative to USOIL. For some reason, we cannot perform old historical calculations using oil.
They show that the commodities prove a big motive for everyone. Especially to those who seek war.
Would anyone in their clear mind expect WWIII to be talked about in the 2020s? With the knowledge we have collected throughout all these years, this would be out of the question! Yet, here we are, casually talking about it. Again, changes are happening but we are stuck in a cycle. All we can do about it is to understand where we are, and not constantly deceive ourselves and others into thinking otherwise. So there is a clear benefit into just realizing where we are, it is not financial profit, it is speaking truth.
Conclusion? This is a zero-sum game for consumers. Also, with bonds we are committing hubris. Bonds is a mechanism that helps money itself make more money.
Have you heard about the Ancient Greeks? They talked about the fact that when money makes money, it is Hubris (something like sin, only worse).
Equities gave more output than there was input, if someone includes long-term dividends. You working and making money is not Hubris (according to Ancient Greeks). Making a system which enables money to make money, then you commit Hubris. Consistently higher yields will help money make even more money.
Equities are facing Nemesis (compared to bonds). Bonds have just now committed Hubris. There may be many years until they face Nemesis as well.
Tread lightly, for this is hallowed ground.
-Father Grigori
PS. This movie "good bad ugly" was released in 1966, a period financially similar to the one we live now.
We bounce and most claim a bull market alreadySo you think we entered a V shape bull market? Lets just forget we have unsustainable amounts of debt, we gone from QE to QT and from rates at zero to world record speed increases making a 40 year long us10y breakout.
US10Y : What the Market is saying.The above chart explains.
There were 2 important events this week, the Fed raising 25bps and also the BLS delivering a 'spectacular' jobs report.
So what is the market reaction and what is the market actually thinking???
I think a simple look at the yield can tell us much. We can use it to guide our trading for the coming week.
Good luck.
P/S : As always, do not just believe what I say. Use your common sense.
The next rate cycle is going to be inflationary...We will have a deflationary crisis before super inflationary crisis. During the upcoming rate cycle we will have inflation going up at the same time as rates. Welcome to a new world. At least in the US. I've been saying this for years, higher rates only compensate inflation it doesn't fight inflation.
US10Y: Something bad is about to happenUS10Y finally catching a bounce at the 200 DMA with a daily hammer and bullish continuation in tandem with a DXY pump. Additionally, there is bullish divergence on RSI. Possible double bottom here.
Something bad is about to happen. Delayed reaction to Apple/Amazon/Google earnings? Debt Ceiling "Crisis"? Ukraine/Russia Update? 666th COVID Variant?
Won't really take US10Y to seriously unless it gets above the long term .618 fib at 3.62%, and holds it as support.
What is the Terminal Rate and Why Does it Matter?What is the Terminal Rate and Why Does It Matter?
When looking at what’s going on in the world of interest rates, it’s pretty easy to get lost in the different terms central bankers and financial media use.
Tapering, pivot , neutral rate, fed funds target range, quantitative tightening…
They don’t make it easy to understand!
But something that has become more and more key as we have gone through this (seriously) rapid rate hike cycle that started at the beginning of 2022 is where the peak in interest rates in the US will be.
This is known as the terminal rate, and we are approaching it…
Maybe.
In the chart above, you can see where the market is pricing for the peak in US interest rates to be - about 5% in May with a slightly outside chance of the peak extending to 5.25% in June.
And what matters most is the change in that outside chance of the extra 25 basis points for June being more and more priced in.
If that were to happen based on the macro data, the market might start to feel like risk is most certainly off once again (stocks fall).
This is because for the last 3-4 months, the terminal rate has changed only slightly around the 5% mark, meaning the market has gotten comfortable with this data being priced into the future path of asset prices.
Any deviation, even minor, from this would be trouble, especially if the general context sours, such as if geo-political risk enters the fray (as it has over the weekend with the reports of the drone strikes in Iran).
Interest rates are effectively the barometer of the opportunity cost of holding one asset vs another so if the rate of interest is expected to increase, you can bet the market thinks it’s effectively not worth holding onto riskier assets (like tech stocks).
So if you hear the phrase ‘higher for longer’, what we really have to translate this to is ‘investors will think risk assets are more expensive to hold and so will buy less of them until it’s safe to resume buying again (which we will come onto in the next idea we post!)’.
But what, right now, could influence whether the terminal rate stays at 5% for May or gets pushed back or higher?
Enter the 3m10y chart.
This shows the spread between the US 3 month treasury bill yield and the US 10 year treasury note yield.
And right now, it is signifying that growth 2 years out (the 3m10y curve is also called the ‘public sector yield curve’) is looking rather glum, based on historical data on forecasted GDP growth from the curve structure.
This is obviously a natural phenomenon after the Fed raised rates at the front end of the curve so rapidly in 2022, but the concerning aspect is recession tends to come when the curve reverts back towards positive territory again… and it’s currently about 35bps off the January low.
What does this mean then?
Well, it could be that the Fed is going to focus more on the yield curve and how it behaves over the next few months, purely because they are 100% aware of the implications of a reversion-post-inversion yield curve: recession.
Whilst Powell pleased the markets with a more doveish tone in his press conference last night, the statement released by the Fed was very hawkish. The Fed maintained that “ongoing increases in the target range will be appropriate” to bring price pressures under control.
If the Fed is completely adamant that inflation has to get down to 2% again then this could imply the terminal rate extends beyond 5%, even if not reflected currently in market pricing.
For this to occur, there will likely have to be more strong positive prints in NFP numbers and for PCE inflation to remain elevated. It’s a tough ask, but the structural changes in the inflation backdrop and dynamic could cause this type of mess to unfold, which is naturally painful for most portfolios.
The biggest risk that we can see from a situation like this, though, is the left tail of the price distribution curve comes into play.
This is where liquidity gets extremely thin and we see 3 standard deviation negative moves, which tend to precede recessions, and end up breaking the normal distribution of asset price returns (they end up happening many times more than predicted by a normal distribution of values).
We hope this doesn’t happen, but we must start preparing for these times where the market feels stressed, because the Fed is currently not there to support with monetary liquidity!
Good luck and always remain aware!
