These charts suggest the U.S. 10-year Treasury yield’s uptrend has ended

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A chart of the yield on the benchmark U.S. 10-year Treasury note yield suggests the Federal Reserve’s interest rate hikes are finally having an effect on the bond market’s perception of inflation and economic growth.

The 10-year yield
TMUBMUSD10Y,
3.376%
slipped last week below a key uptrend line, that’s been rising since the Fed’s first rate increase of the current cycle in March 2022, to combat a surge in inflation.


FactSet, MarketWatch

When an uptrend line breaks, there is typically a bounce back up to the trendline to test the break, to see whether those who are betting on a decline are still willing to fight for their view. The yield’s bounce earlier this week after the Fed’s latest rate hike merely tested the break.

The fact that the yield has fallen since then to fresh lows — the yield was down 3.5 basis points (0.035 percentage points) at a 6 1/2-month low of 3.367% in afternoon trading Friday — is a sign that the “break” passed the test, which technically confirms the uptrend defined by that trendline has ended.


FactSet, MarketWatch

There’s more. The yield has also formed a “double top” reversal pattern.

Double-top patterns depict failures, as after a pullback from a new high, bulls fail to reestablish the uptrend, especially when the second peak is below the first high.

The yield’s peak above 4.2% in October 2022 is the first top, and the early-March top just above 3.7% marks the second top. With the yield falling Friday below the January trough of 3.375%, which was the low between the two tops, the failure is confirmed, the reversal pattern in completed.


FactSet, MarketWatch

Falling below the January low also kicks off a pattern of lower highs and lower lows, which many on Wall Street say is the definition of a downtrend.

Dan Wantrobski, technical strategist at Janney, said in a recent note to clients that he still sees support for the 10-year yield existing down to about 3.30%, and the yield appeared “moderately oversold” on a short-term basis.

He said a close below support will trigger a “bigger sell signal” that will target the 2.80%-to-3.00% zone.

The yield is suggesting the Fed has finally started winning its fight against inflation. The fact that it took the Fed about a year, rhymes with what happened 30 years ago.

Read more about what falling 10-year yields means for mortgage rates.

Keep in mind that in the 1990s, the Fed didn’t announce its target for overnight rates, or “fed funds,” it just used market operations to add or drain liquidity to guide the overnight rate to where they wanted it. And market participants watched those market operations very closely for signs the Fed changed its target.

Here’s a chart of the effective fed-funds rate during the rate-hike cycle that started in January 1994, according to data provided by FRED, the Federal Reserve Bank of St. Louis:


Federal Reserve Bank of St. Louis

Almost a year later, the 10-year broke below the trendline that started after that first rate hike.


FactSet, MarketWatch

If there is a bright side to the current 10-year yield’s fall, a recession never materialized in the wake of the 1994 rate-hike cycle and yield breakdown. The Fed started cutting rates in the summer of 1995, or about 18 months after the first 1994 rate increase.

For 2023, odds are rising that the fed-funds rate will start falling before year-end, which would rhyme with the timeline 30 years ago.

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