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Technical Update - US 10-year Treasury yields close to 4%. Correction time or will it continue higher?

Bonds 3 minutes to read
KCL
Kim Cramer Larsson

Technical Analyst, Saxo Bank

US 10-year Treasury yields closing in on 4%. Multi decade long term down trend has been reversed. But short term yields are a bit stretched technically and is getting ripe for a correction. 



The uptrend in US 10-year Treasury yields since bouncing from support at 2.55 has been a straight line. After breaking above 3.50% the uptrend has accelerated closing in on 4% key level.
RSI is above 75 and above levels at where yields previously have been hit by a correction.
However, there is no divergence on RSI which indicates higher levels is likely and a spike up to test the 4% before a correction occurs is a likely scenario.
the 1.618 Fibonacci projection of the above-mentioned correction is just above 4% at 4.09%. A spike up to that level should be expected before a possible correction.

Source: Saxo Group

Longer term view
In March this year the US 10-year yields broke above the 200 Monthly SMA for the first time since the 1980’s. It is a major change of longer-term sentiment. Combined with a likely September month close above resistance at 3.26% the multi decade longer falling trend has reversed.
4% is now the key resistance. 4% is not only a psychological level but a resistance level back in 2008 during the Sub-prime crisis.
There is currently no divergence on RSI indicating yields are likely to penetrate the 4% resistance. If that scenario plays out there is no strong resistance before 5.00-5.32%.
To reverse the bullish picture yields need to drop back below 2.50%.

Two monthly charts. Longer term picture back 50 years and zoomed in on the past 15 years

Source: Bloomberg
Source: Saxo Group

The US Treasury future seems to have found support at $111 in what looks like the fifth wave lower.
If this is the fifth vawe lower, it should as a minimum be as long as the first vawe which has been reached.
However, (and now it gets a bit nerdy, sorry) fifth vawe will often be longer than vawe one. It usually moves to the 1.618 projection of the fourth vawe (red set of Fibonacci levels), close to the 0.618 Extension level based on the third vawe (blue sets of Fibonacci levels) AND close to the 1.382 projection of the 201-2020 bull market (green sets of Fibonacci levels). In other words, a cluster of Fibonacci levels around 109-108½.

However, if the future closes below support at 111 it could extend the down trend to the 0.786 Fibo Extension level at 105 12and even dip down to the 1.618 projection at 103, close to the 2006-2007 lows at around 104
To reverse this bearish picture the future needs to close above peak of vawe four i.e., above 122.

Source: Saxo Group

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