By all accounts inflation levels are beginning to accelerate globally and the Fed appears to be more committed than ever before to raising interest rates next week. Markets have spent the last couple of weeks pricing in a more aggressive Fed tightening timeline, however, something interesting may be about to happen at the long end of the yield curve.
The yield on the U.S. 10-year Treasury Note jumped above 2.60% in the last 24 hours, close to the level which it peaked at in mid-December:
10-Year US Treasury Yield (Daily)
It is still too early to proclaim that a double-top is in place, however, the makings of a double-top are certainly present. Including bearish momentum divergences and a push above the upper 2-standard deviation Bollinger Band.
If long end yields do begin to pull back as fund manager Jeffrey Gundlach predicted earlier in the week while the Fed pushes up short end rates we will begin to see a flatter yield curve. Flattening yield curves have often preceded recessions such as we saw during 2006-2007. In addition, steady or falling long bond yields laid against a backdrop of rising consumer inflation results in negative real yields which has historically been a bullish formula for precious metals.
Finally, there has been a lot of talk about the end of the long term bond bull market. Before we get too carried away take a look at the following 40 year chart of 10-year Treasury yields:
U.S. 10-year Treasury Yield (1977-2017)
Let’s get above 3.00% and then maybe we can talk, until then yields may be on the verge of another cyclical leg lower….
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