By Jim Donnelly, Olson Global Markets
On the eve of the New Year, the yield on the U.S. Treasury notes tested key trend line resistance at the 3.034% level (or the 30.34 level on TNX) but did not break above it. Overextended stochastic and RSI readings suggest that before higher yields are scored, a decline or a correction in interest rates to lower levels might soon unfold instead.
With Janet Yellen likely be confirmed as Chairwoman of the Federal Reserve System later today (January 6), it might be an apt time to retest key trend line resistance on 10-year treasury yields. But will interest rates extend to higher levels before Yellen takes the reins of the Federal Reserve System on February 1? No one really knows.
What is interesting is that the S&P 500 Index, the Dow Jones Industrial Average and the Dow Jones Transportation Index are all sitting just below their respective long-term resistance trend lines. Conversely, the Dow Jones Utility Index is sitting just above key trend line support. Each of these indices could ebb away from these critical levels until another time. But if they were to each to stage breakouts (or a breakdown in the case of utility stocks), a new phase of market psychology and trading activity could emerge.
If 10-year treasuries were to break solidly above 3.034%, a possible move up to key trend line resistance in the 3.46% area could then follow. In turn, that would likely strengthen the U.S. Dollar Index, but could narrow margins on corporate profits and dampen mortgage activity at the same time. If on the other hand, a series of reports showing additional signs of economic strength and improving employment conditions were to be unveiled before February 1, a move to higher yields could proceed.
Needless to say, both the bond and stock markets are now sitting at important levels that will likely have a impact on the next phase of economic growth and the employment picture going forward.