By Jim Donnelly, Olson Global Markets
The debate over whether or when the Fed will begin to taper the size of their security purchases is showing up on the weekly chart of the CBOE 10-Year U.S. Treasury Yield Index (TNX). Although stochastic studies are at a level that suggests the upward movement in 10-year yields may be limited, it does appear that TNX is aimed for a test of an important trend line at the 30 level, representing a 3.00% yield. The question is: Will yields rise above 3.00% over that short-to-intermediate term?
On one side of the ledger is the appearance that the economy is improving and getting healthier, a condition that is often accompanied by rising interest rates. In this particular case however, a number of Fed officials have made it clear that short-term interest rates will nevertheless remain near zero for a prolonged period of time. If so, a steepening of the yield would result which, in turn, would strengthen bank stock prices since the spread between longer dated loans would rise versus their cost of funds at near zero percent.
On the hand, if 10-year yields were to rise above 3.00%, mortgage activity and home sales could retreat again, as they did back in May when Chairman Bernanke suggested the case for tapering then. Since the housing sector remains a major force in the domestic economy, a rise in 10-year treasury yields could crimp expectations for an accelerated economic expansion.
Other factors such as full-time jobs gains, weekly wage gains, industrial production, capital expenditures, healthcare costs and the inflation/deflation outcome are clearly part of the mix as well.
That being said, if U.S. Treasury 10-year yields were to break above 3.00% the next key level to focus on would be 3.47% where another trend line currently sits as resistance. A failure to break above 3.00%, let alone even testing it, could instead result in a retest of key support at 24 on TNX, representing a 2.40% yield on U.S. 10-year treasury notes. The key thing to remember is that the Fed appears anxious to begin the taper process, but the trigger to that initiative will remain data-driven.