By Jim Donnelly, Olson Global Markets
As the yield curve steepens amid concerns that the Federal Reserve may begin to “taper” the amount of their monthly securities purchases, the chart of U.S. 10-year Treasury note interest rates (TNX) suggests that higher yields are likely to evolve. Weekly and monthly bar charts technically favor a move to higher yields, possibly up to a test of key trend line resistance currently at 2.60% from Friday’s 2.164% closing level.
That being said, when looking more carefully at TNX on the daily time frame, it is interesting to point out that two (2) key “gaps” remain “open”. The first sits at 2.03%, but the second sits at a much lower yield of 1.817%.
While “gaps” do appear frequently on daily bar charts of TNX, almost all of the “gaps” created in recent years do eventually get “filled” (or tested) before a major trend resumes its path or changes course.
A potential move down to 2.03% or 1.817%, however, would suggest that another “run to safety” trade may now be looming. If so, the chances that equity markets may have entered into a correction phase are reasonably good as well. It is likely that Friday’s late selloff in the U.S. stocks during the last 15 minutes of the session (which was attributed to a “rebalancing” trade with few buyers around to blunt the selloff due to month-end considerations) could spill over into Japan’s equity market early Monday morning.
If such a carry-over selloff in the Nikkei were to unfold Monday, a move into longer-date treasuries could be triggered. Later in the week, a weaker-than-expected U.S. monthly jobs report due out on Friday could enhance the move into Treasuries as well.