Despite a better-than-expected weekly jobs report, lower energy prices, a rise in the July ISM non-manufacturing index to 58.7% from 56% and a largely upbeat earnings season for Q2, yields on U.S. 10-year Treasury notes (TNX) tumbled to 2.35% before ending the week at 2.415%. Declining yields on European and Japanese sovereign debt and a series of provocative geopolitical events in Ukraine, Iraq and Gaza appeared to trigger a rise in global economic uncertainty resulting in the flight to quality trade into U.S. Treasuries.
From a technical perspective, it now appears that even lower yields might be on the way. A drop below key neckline support at the 2.45% level (or 24.50 on TNX) has raised the likelihood that a Head & Shoulders pattern on TNX targeting a decline to 18.65 (or 1.865% on 10-year treasury yields) could play out. Such a scenario suggests that global tensions will likely intensify and in doing so, have a negative impact on global growth and future earnings expectations.
On the bright side of the ledger, the beneficiaries of such an outlook could be the housing and mortgage industries with the potential of an uptick in new mortgage issuance a distinct possibility. A new round of mortgage refinancing activity could jump as well. In addition, the utility sector as well as bank preferred stocks could also catch a second wind of investor interest. Only time will tell, but the clouds of investor uncertainty are clearly getting darker.