Steve Blitz Morning Notes

I originally posted this on June 26, which was an update of a forecast from March. In sum -- 10 year Treasury yields bottom in the year after a recession ends. This round will be no different. Herd thinking that yields are heading higher because of inflation risk etc have spent too much time thinking and not enough investigating and understanding markets. The 10-year will likely test 3% before the year is out and drop to 2.75% or thereabouts would not be a surprise. Will yields move higher over the long-term? Yes. But not soon and certainly not now.


Which way next for the 10-year Treasury yield? Lots of opinions and the yield curve implies that rates are going to drift higher. The forwards imply a 3.61% yield on the 10-year in three months, 3.75% in six months, 3.92% in a year, 4.20% in two years and 4.5% in five years. Anyone who has ever traded or invested knows that making money means betting against the curve. The current curve is easy to bet against, which way is another story. If there is one thing to be certain about is that the 10-yield will not quietly drift higher through the next five years.

From a fundamental business cycle standpoint the chart below shows that the 10-year yield bottoms some time after the recession is over -- and consistently so. Unless you think the end date for this downturn is in, needing only the NBER to confirm, then lower not higher yields are in store.

The next chart illustrates the long downward trend channel that the 10-year yield has been traveling in since Summer 1986. Unless and until yields break from this range, claims that a long-term bear market has begun do not hold technically or fundamentally (timing of low vs recession's end). This isn't to say it won't happen it just isn't happening now.

Some posts back I wrote that the market at 4.0% was topping and it would not surprise me to see yields break back below 3.0%. Current price action supports my view for lower yields (see daily chart below). A critical test of market support will be around 3.27%. If buying continues through those yields, and the odds are in favor of continued buying, 10-year Treasury yields would drop to around 2.80%.

Interesting pattern in government bond trading is that the market retests the low price (high yield) but the high price (low yield) need only be touched once. As I wrote above, the long bear market in Treasury yields has not yet begun -- but if my read of the current rally is correct it will start in earnest later this year or early next.