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US 10 year yields remain in downtrend, but for how long?

There’s been a lot of discussion in the last few days about the likelihood of the start of a bond bear market where prices slide back sharply and push yields higher.

Looking past the headlines it’s always a good idea if you are a trader is to trade what you see and for the moment we remain in a downward trend for yields though we could well start to push higher if we see evidence of inflation making a comeback. This is where technical analysis can come in useful in terms of risk management and identifying potential turning points in long term trends, though there are always cynics who question its usefulness.

Source: Bloomberg

Since 1988 yields have fallen steadily and the rally from the lows in 2016 has been slow and steady with the 10 year yield hitting 2.63% in March last year on speculation over the Trump reflation trade and when China was selling US treasuries in an attempt to manage capital flight by intervening in FX markets to support the Remnimbi.

Yesterday’s move to 2.6% saw the yield kiss the top of the long term downtrend line that has been in place since 1988, before slipping back.

Whatever your views on the merits of China diversifying out of US treasuries it’s unlikely that they would embark on such a measure in such a way that would do them economic damage, and it’s not the first time we’ve heard such stories in the last ten years, and it’s unlikely to be the last. Even if were true and SAFE has suggested it is “fake news” the money needs to have somewhere else to go to and with the ECB and Bank of Japan still in easing mode there aren’t that many other places to go.

What this chart does seem to be telling us is that yields could well be looking to carve out a bottom having seen two separate tests of 1.3859% on the downside. The next key levels on the upside are last year’s peaks at 2.63%, with a break there targeting the peaks at the end of 2013 at 3% which could mark the top of a potential double bottom.

A break above 3% in the coming months would be even more interesting, potentially sending 10 year yields back to 4.6% on a measured move basis.

For now as far as the price is concerned everything else is noise but given recent sharp rises in oil and other commodity prices it does seem likely that inflationary pressures could well increase in the coming months.

If that is the case central banks are likely to tighten further in the Federal Reserve’s case, particularly if recent US tax cuts push prices up, while the Bank of Japan and European Central Bank could well dab the brakes further in the coming months.

It is actions such as these that could see bond prices sell off, not the actions of the Chinese or the Japanese for that matter

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