Some Bond Yield Levels To Look Out For

 In yesterday's post I wrote that the bond bull market is the longest and most significant in financial history. Yields on 10-year Treasury bonds have been dropping steadily from 10.50% in 1985 to 0.50% last year's pandemic low. They are at 1.57% right now.  

What could signal the end of this run? 

• On a fundamental basis, it is already happening. We don't have to do fancy analysis: inflation is at 5.2% and the 10-year Treasury is yielding only 1.50%. Adjusted for inflation, bond investors are losing 3.70% every year - obviously, this cannot go on for long.The last time inflation was at 5% the bond yield was at 4% - see below.

CPI Inflation And Yields On 10-Year Treasury Bonds

• On a technical basis (ie looking at chart patterns), yields are very close to breaching a technical resistance/reversal level on the upside. On the chart below, it's the lowest thin red line, a "neckline" for an upside head and shoulders pattern. Right now, that level is at 1.65-1.70%, and if it is breached decisively on the upside it "reads" to 3.00% (thick solid red line). But, at the 3% level the very long term channel will also be breached, so I would not be surprised to see rates go to the next resistance at  5.00-5.50% (dotted red line). And guess what? - that's where inflation is today.
  

 Ten Year Treasury Yield - Annotated With Technical Resistance Levels

• All of the above is equivalent to reading tea leaves or consulting the oracle of Delphi  What is more significant, in my opinion, is that we cannot continue to run monetary policy on hope alone, hope that inflation will quickly subside back to 1.5-2.0%.  We need to face facts right now and act accordingly, before it is too late.

• It's not like we haven't seen this before. A massive spike in energy prices in 1973 created a vicious cycle of consumer price and wage increases that lasted over a decade and eventually required extremely painful medicine to reverse, with short term rates soaring to 20%.

 Inflation And Fed Funds In The 1970s And 1980s  

• One final remark, again on China-US relations. The tide has turned, we are no longer partners with mutual economic interests, but rapidly diverging adversaries. Do not - NOT - expect China to do us any favors. It will not keep buying ever more US bonds: they are already net sellers, despite ongoing huge trade deficits.  According to the US Treasury/Fed, China's holdings of Treasurys this July were $1.295 trillion vs $1.318 trillion in January (both including Hong Kong).  That's not a big drop, but consider that in the same time the merchandise trade deficit reached $187 billion. If anything, China's Treasury holdings should have increased, not gone down

Inflation is rising rapidly, bonds are at big negative real yields because of the Fed's daily manipulation (QE), and China is getting seriously antagonistic. Watch those tea leaf yield levels: 1.65-70%, 3.00% and 5.00%.