There is an old market adage that says the bond market is smarter than the stock market. This saying does hold water when you think about it. Consider this, we live in a financial system that is built on debt. Many investors borrow money and attempt to earn a profit with that borrowed capital. These days interest rates are extremely low, we call this “easy money.” This has opened the door for almost anyone to borrow money at a low rate, while being able to handle higher debt loads due to the low interest on the capital borrowed. As of this moment, it looks like it is still a good time to borrow “cheap” money. But the big question remains… how long will the low rates last?
The reality is, inflation is here and this can be seen and felt everywhere these days. Fuel, copper, steel, lumber, food and endless other products and services have jumped significantly in 2021. The only way to really fight inflation is to raise interest rates. At this time the Federal Reserve is holding the fed funds rate at 0-0.25%. This is the overnight lending rate between the large banks. However, the public does not get access to this low rate. Instead, the average guy will be able to borrow at the prime rate, which is much higher. Today’s prime rate is around 3.25%. This is historically very low and many people are taking advantage of this. The real factor to consider is that should interest rates rise it will make borrowing more expensive, which will ultimately slow down the economy.
These days there are some market correlations that seem to be affected by the movement in yields. When yields fall it seems that technology stocks do well, but financial stocks slump. At this stage, the 10-year U.S. Treasury Note yield is around 1.26%. Yields will likely see another dip down to around the 1.0% area. This is where the chart shows very good technical support for the 10-year note yield. As you all know, when yields decline it means that bond prices are rising. If the large time-frame chart pattern structure plays out like I think it will, it should indicate a significant move up in 2022. With that said, in order to stay ahead of this curve, you must watch the chart.
The all-time low yield on the 10-year note took place in March 2020 during the coronavirus scare. At that time, the yield went as low as 0.398%. Since that 2020 low, yields surged and went as high as 1.765% in March 2021. We have now witnessed yields pullback for 5 months, but it looks like a higher low consolidation pattern is forming. This should lead to another surge higher in bond yields. This chart pattern suggests that yields on the 10-year note are headed back to around 2.5%. The hard part about this forecast is really isolating the catalyst for the move up. Could it be the Federal Reserve beginning to taper their bond current $120billion buying program and ultimately raise rates in the future? Perhaps, but then there is always the chance that the markets force the central bank to take action by yields simply rising on their own as investors simply no longer want to hold U.S. debt.
Regardless of the catalyst, the writing is on the wall and nothing lasts forever. What we should do now is look for one more near term minor dip in yields then be ready for a big move back to new 52-week highs.
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