Is A Death Cross Coming In the 10-Year Yield?

April 4, 2014

Well – there it is – almost – again.

Yes, I am talking about a potential Death Cross in the 10-year U.S. Treasury yield and something that I have been waiting for quite patiently for nearly a year now. 

​“Again” because we were 5 to 6 bps away from this bearish-for-yield but bullish-for-bonds event happening last May when it was suddenly diverted by all of the taper talk that hit the town and the tape. 

However, when a significant technical event of this nature comes this close to happening, it usually does – at some point – and thus my patient wait.

Now the 10-year yield’s 50 DMA is 1 bps above the 200 DMA and this suggests a Death Cross may be coming. 

Should the 10-year yield put in an actual Death Crossas the 50 DMA drops below the 200 DMA, it would likely signal a rally for bonds and an accelerated slide down in yield with bonds trading inverse to yield. Put otherwise, a possible Death Cross in the 10-year yield would probably suggest that this year’s rally in bonds is likely to continue and perhaps gain significant momentum.

​That this could occur in the face of a Federal Reserve that is actively tapering its bond buying program and throwing out potential timelines on when it may start raising rates again is stunning – at least to me.

It tells us that the bond market may not believe that the Federal Reserve will be able to stay on its new “hawkish” course.  

More practically, it may mean that the bond market does not think the Fed will be raising rates around this time next year and it may even suggest that bond investors think the Fed will have to stop its taper or even add back to QE-Infinity at some point.

​This is certainly consistent with the patterns and trends in the 39 month daily chart of the 10-year yield below.

Specifically, the 10-year yield has been rebuffed by what appears to be resistance of a multi-month trading range with the deflection reversing last year’s parabolic uptrend on what may prove to be a topping pattern of some sort if – and this is a big “if” – the current coil fails to produce a new high and one well above 3.00%.

This coil represents all of the market confusion and uncertainty after the decline to about 2.56% in early February and it will produce a proportionate reaction up or down. ​If the coil resolves up, the 10-year yield will need to close above about 2.80% for a target of about 3.00%. If the coil resolves down, the 10-year yield will need to close below about 2.60% for a target of about 2.40%.

Due to last year’s “almost” Death Cross in the 10-year yield and the subsequent parabolic move higher, I won’t count this one as hatched unless it actually happens and this means a close with the 50 DMA actually below the 200 DMA.

​Should the current coil react to the upside, it would certainly put this Death Cross possibility on hold, but not entirely foil it because the 10-year’s topping pattern could morph in any variety of ways before reversing all the way back down to where we were before all of the taper talk started near 1.61%.

​When we were near those levels and a Death Cross almost occurred last year, it seemed to signal what a potential Death Cross would signal today and this is a significant decline in yield as in 50 to 100 bps if not more.

In other words, I thought we were looking at a sub-1.00% yield when the 10-year yield came so close to putting in a Death Cross last spring and a view that I have held since 2011 based on the charts.

​Well close only counts in horseshoes and hand grenades and something that remains true today too, but nonetheless, I still think we are likely to see a sub-1.00% 10-year yield with JGBs having set the precedent. 

This possibility is the true quicksand of the Fed Trap discussed last month, but it would likely be instigated by a true risk-off context and something that could prove 2013 a false initial reaction with previous Death Crosses in the 10-year yield acting as one of the better “tells” on what is more widely known as a stock market correction.

Specifically, over the last roughly 7 years, there have been 4 solid Death Crosses in the 10-year yield: September 2007, September 2008, June 2010 and June 2011.

Needless to say, the September 2007 Death Cross in the 10-year yield was probably the biggest risk-off shot across-the-bow possible, September 2008 needs no explanation, June 2010 accompanied the very volatile equity markets around the Eurozone crisis that year and June 2011 came just weeks before that year’s 20-30% correction in the equity markets.

​Might such a possibility happen this year? Well first we need to see if a Death Cross takes place in the 10-year yield and then if it does, I would say there’s pretty good chance we will see the equity markets correct by at least 20% and something that would prove 2013 a false initial reaction – to me at least.

​Should both of these bearish-for-risk events occur, it will be interesting to see what fundamental factors could prove this year’s preference for safety a wise path to tread along and a possibility that makes it worth wondering whether a potential Death Cross is coming in the 10-year yield.

​As always, thank you for taking the time to read this month’s piece.


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