Do you really need to ask if interest rates have topped out?
Head & Shoulders patterns at tops and bottoms are generally spot on...this Inverse H&S pattern occurred at a bottom, clearly broke out from the neckline and just wants 5%...at a minimum.
"Don't fight the Fed" The Fed is not going to pivot to the downside anytime soon...why would they? What makes anyone think this is on the horizon? Here are the 3 things Powell stated would need to happen for a pause (not a pivot ) at Jackson Hole: 1. Lower Growth 2. Softening Labor Market 3. Inflation on pace to 2%.
2022 Q2 vs. Q3 GDP came in positive and much stronger than expected, Jobs reports remain hot and inflation isn't anywhere near 2%. So at this point, we can't even check off any boxes for a possible pause in rate hikes let alone a pivot . In addition, Powell hasn't really wavered in his statements since Covid, he's been pretty straightforward, so why would he all of a sudden change his behavior?
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10 year-Doubling the range...Interest rate increases are not "transitory”
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10 Months later and the 10 year finally hits 5%!
Now lets go back to Powell's statements at Jackson Hole: Powell stated the following would need to happen for a pause (not a pivot): 1. Lower Growth 2. Softening Labor Market 3. Inflation on pace to 2%.
While the FED has paused rates hikes (while maintaining it might not be a complete pause) none of the above have been met at this point. We just had a good GDP print, employment is still strong & inflation has come down but it has accelerated in the last couple of months. I guess maintaining the stance that rate hikes are still on the table allows him to save face? At the end of the day, the bond market is doing his job with the recent acceleration in rates on the long end of the curve.
Absolutely brilliant! Calling for 5% yields almost a year before when yields were below 4%.
arama-nuggetrouble
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Hi HappyClouds. Hope you and your family are enjoying the holidays. I agree that rates have higher upside and that we have entered an environment riddled with moderate inflation. The last 10 years, Tech boomed these next 10 years, commodities will. I see the US economy's increased resiliency and higher than expected growth to be the reason rates stay high leading the fed to tighten more. I am looking for 4.5% - 6% on the US10Y. But, everyone is pricing in a recession by Q4 2023. Leading to the decline in US10Y (long bonds) and the dollar. A lower dollar increases prices of commodities and lower rates make for easier economic conditions. The exact opposite things we need to bring down inflation. So, maybe the US10Y goes to 3% before going to 6%????
T-r-X
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Isn't the best time to buy longterm US treasuries when the yield curves invert? (US10Y-US02Y, US10Y-US03M,..)
Vixtine
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@T-r-X, All I know is that the chart is saying bonds are "not it" for the time being (until the 10 year hits 5%, at a minimum, and then we can see how it behaves, etc) but the 10 year HAS broken out of it's downtrend line and it's done it with vengeance and the chart showing the doubling of range should give anyone saying "go long bonds" some hesitation. Lots and lots of people right now are talking about going long bonds...for me the damage is done and I don't see the catalyst for a V-shaped recovery on them at this point. Friday produced a very bearish candle on BOND and TLT is coming up on 150 SMA resistance....if I was in either of these ETF's I'd be looking at this bear market rally as a chance to exit. Maybe the 10 year starts to level off but unless we have a severe recession or depression then that's all it will do....level off. Anyone thinking we are in or heading for a severe recession or depression might be right in the medium term (5-7 year timeframe) but I just don't see this happening until rates are in the 4-5% range for some time...then we will find out what breaks eventually but time must play out. For now, I see this bear market as a bear market because of the ROC on rates. I mean...we are in a bear market and TLT/BOND ETF's had been leading the NDX in term of losses; as of yesterday they are about break even. That's just crazy if you think about it.
T-r-X
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@Vixtine, 30 year yield has dropped from 4.382% to 3.447% already. Looks like some entities are buying 30 year US treasuries.
Vixtine
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@T-r-X, Charts tell a different story IMO...nothing about ZB (bond futures) is at all LT bullish? The bullish case was a double bottom (yellow line) but it's clearly exceeded that. Right now it is mostly likely just re-testing the break down area. The H&S (no matter which way you do it-wicks vs. no wicks) played out and then went even further beyond that range. Volume isn't saying anything. The charts to me are saying bonds will not be the winner in the medium term and nothing about the macro says bonds will see a V-shaped bottom. So I remain in the "this is just a bear market rally" camp.
T-r-X
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@Vixtine, Thanks for your analysis, we'll see in the coming months.
heavy_assault
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@T-r-X, probably, but without fed manipulation 3.5% is around normal, for low inflation environment. i agree with the other guy, 10 year should be near 5% in this high inflation macro. there are many structural tailwind for inflation, like deglobalization (china was a major source of disinflation), governments purposely keeping inflation elevated, reshoring of many american tech companies, oil underinvestment. though oil markets are crashing recently, fear of recession is too great i guess.
tldr, i don't think current yields are a good buy. maybe look up jeff gundlach, he's experienced in bonds. he did say when it was ~3.9% bonds are wickedly cheap compared to stock, which i fully agree. bonds are overpriced but stocks are EXTREMELY overpriced, especially the mega cap tech stocks.