Bonds have shaken off Europe’s slight weaknesses and started a new week in a slightly stronger territory. Profit continues to domestic time, yielding yields close to Thursday’s lows. Below these, you will reach the highest level in 3 weeks.
Since exceeding 2.40% (10 years) in March, we have been monitoring and waiting for signs of rate caps. These efforts have been accompanied by a series of disappointments and additional actions towards higher rates. That said, each attempt to solidify the ceiling, if at all, has gradually become more convincing. This morning’s strength means that this attempt fits the same pattern.
What signs are you looking for to see the shift? First, it’s important to remember that changes in the data will shift things to higher rates, even if the bonds meet the shift criteria. Inflation remains the biggest problem, and inflation must continue to fall in order for interest rates to remain capped.
Beyond that, some technical milestones can be used to benchmark progress. One of the broader indicators we are tracking is the Stochastic trend seen in the chart below. In a nutshell, the conditions that need to be met are:
1. Stochastics need to tend to gap up from overbought levels and move into oversold territories without major modifications.
2. After reaching the oversold area, the reversal should break the yellow trend line and return to the lower (overbought) line.
Historically, both the break in the trend line (the gray vertical line) and the return to the overbought level (the vertical line in the teal) were good signs of the big picture.
The only major problem with this analysis is the limited number of suitable examples. Here are some other things, followed by some thoughts about each.
The most notable difference in the 2016 example was that it was not a precursor to major immediate corrections. Basically, it was the minimum to count as “confirmation of the upper limit”.
The 2012 example is not ideal because the market conditions were very different from 2016 or now. Probabilistic trends have emerged in a very flat market. This probably means that, in my opinion, I don’t pay any attention to this. Still, it’s the next latest example that officially fits. It definitely confirmed the cap, and both milestones (gray and turquoise lines indicating the level of technical breakout and overbought) brought additional benefits to the bond.
Basically, we’re reaching the “gray line” level today, so there’s a way to go before looking at the pattern, as you can see in the turquoise line in the graph above. If you want to think of all this in more basic terms, old-fashioned pivot points can help. In that respect, 2.83 and 2.72 are the only obvious games in town.