10-Year Treasury Yields Strong In Multiple Time Frames

06/01/09 12:56:47 PM

by Ron Walker

Yields on long-term Treasuries have been steadily rising, with 10-year notes racking up huge losses on speculation that the U.S. economy will have a slow recovery period. The U.S. government's excessive borrowing has overwhelmed any efforts to keep interest rates at bay.

Security: $TNX
Position: N/A

A recent steep drop in the price of the 10-year Treasury note pushed its yield up to a peak in May to a 3.71. Bond investors continue to sell the 10-year Treasury note on concerns that the huge amount of debt the government is selling to fund its bailout programs will keep Treasury prices down. This has caused yields on long-term notes to aggressively rise.

FIGURE 1: $TNX, MONTHLY. The monthly chart of the 10-year yield has formed a long-term falling channel that apparently bottomed in December 2008. The recovery in 2009 is creating a divergence between the MACD and $TNX. Look for the MACD to cross above its signal line and the stochastic to move above 50 once the correction on the daily chart concludes.

Graphic provided by: StockCharts.com.

Yields on 10-year Treasury notes ($TNX) reflect the cost of long-term borrowing. The monthly chart of the 10-year note (Figure 1) reveals that the long-term note has been in a falling price channel since the early 1990s. However, yields may have hit rock bottom in December 2008, where it reversed hard in January, possibly concluding the lower boundary of the long-term channel.

After the bounce in January, $TNX made its way higher. A consolidation took place in February and March 2009. In Figure 1, the moving average convergence/divergence (MACD) (12, 26, 9) has turned up and is coming off its lows headed toward the signal line. Meanwhile, the stochastic (14, 3, 3) is skating toward its centerline at 50 and very well could try and clear it. A bullish move would shift momentum in favor of the bulls in this longer-term monthly time frame.

The continued rise in $TNX will elevate interest rates for the long term, along with corporate bonds and fixed-rate mortgages. Higher mortgage rates will further delay a recovery in the housing market. Meanwhile, the Federal Reserve has been attempting to buy billions in long-term Treasury bonds in an attempt to prop up Treasuries in order to reduce the yield. The strategy has proven to be unsuccessful so far. Treasuries are dropping due to supply and demand, as at this point there are more notes for sale than the Fed is buying. Supply is causing prices to drop. The sharp increase in the 10-Year Treasury yield reflects the growing concern of inflation.

Take a look at Figure 1 again. Note that there is another falling price channel (marked with blue lines) contained within the larger monthly channel. The channel is approximately three years old, the lower boundary dates back to mid-2006, and the upper boundary is from a second peak of a double-top pattern that was carved out in the summer of 2007. You can examine the channel lines more closely on the weekly chart.

FIGURE 2: $TNX, WEEKLY. The weekly chart has had an impressive move from the December lows. Now, prices have put in a bearish shooting star after testing the declining trendline, suggesting further consolidation is needed in order to have the necessary strength to break the trend. Note the price pattern shifting from a double top to a head & shoulders top to a cup with a handle reversal.

Graphic provided by: StockCharts.com.

During the last week of May, the upper boundary of the channel was tested on the weekly chart as $TNX rose to challenge that declining trendline (see Figure 2). This past week, $TNX bolstered above that weekly trendline but failed to close above it. The weekly chart also got a bearish candle. A shooting star appeared at that barrier of resistance. That candle has a long upper shadow and a real small body in the lower portion of the candle. It appeared because prices are simultaneously hitting the downtrend on the weekly, and the upper boundary of the rising channel on the daily chart (Figure 3). This twofold barrier of resistance will weigh the 10-year yield down for the short term.

Nevertheless, this is the second week in a row that the MACD (12, 26, 9) remained above its zero line on the weekly chart. This reveals that $TNX is starting to show some signs of long-term strength.

It was just five short weeks ago that prices broke above key resistance at 30.50. Then, after that level of support was successfully backtested, the advance resumed, and we now have stalled at the trendline from the double-top pattern that was completed in 2007.

Once $TNX clears this trendline, it should rise to the horizontal resistance zone between 41 and 43. But the daily chart suggests that prices might need to build a base before moving higher.

FIGURE 3: $TNX, DAILY. After forming a cup with handle pattern (better seen on the weekly chart), $TNX broke above the handle, blasting off toward the upper boundary of the channel. A reaction there will likely result in a test back to where rising and horizontal support intersect near 30.50.

Graphic provided by: StockCharts.com.

The $TNX daily chart in Figure 3 shows an explosive move higher in the yield, as it shot straight up vertically after the March lows. It has now rapidly become overextended. After being lifted up and hoisted into the upper boundary of the rising channel (rising resistance) on the daily chart, a reaction occurred and prices began to reverse. This indicates that upside momentum is waning in the short term. If prices continue to correct back to the lower part of the rising channel, we may see a trading range develop between the 30.50 and 35.50 level. The stochastic has rolled over crossing below its signal line in exhaustion, suggesting a consolidation may be needed before prices can break out above the weekly longer-term trendline.

What is particularly interesting about the daily chart is how the 50-day simple moving average (SMA) is hovering just below key support near 30.50. Further, the rising trendline is pointing straight up at key support at 30.50, suggesting that the rising trend, horizontal support, and the 50-day SMA are moving in sync and that there is a great deal of support for rising daily channel.

In summary, the prospects of higher yields for the long term look good, but with prices running into rising resistance on the daily chart after an overheated rally, $TNX is overdue for a correction back to support. The 10-year yield has three different channels in play in the monthly, weekly, and daily time frames, working together in harmony to establish prominent points of support and resistance in the recovery process.

Ron Walker

Ron Walker is an active trader and technical analyst. He operates an educational website dedicated to the study of Technical Analysis. The website offers free market analysis with daily video presentations and written commentaries. Ron is a video pioneer, being one of the first to utilize the internet producing Technical Analysis videos. His website is thechartpatterntrader.com