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Reflections #40 - Don't listen to the sirens (yet)

With many well respected bond experts calling for much higher long end yields, should one prepare for a pop in the US 10 year yields to 4.0-4.5%?

There are indeed good reasons to see the long end mispriced, given the curve inversion and the Fed telling us that the front end is anchored. In addition, bond issuance could weigh on the long end in an environment where inflation may remain sticky.

BUT...hold your horses for now as the timing seems unfavorable.

Looking at the long-term US 10 year yield chart, we can clearly see that yields bottomed with a significant rally from the 0.40% low in Jan 2020 (chart 1). The rally fizzled out in Oct 2022 and since then US10 year yields have traded lower in a consolidation triangle (chart 2).

Momentum indicators, which were fairly reliable in a broader context, show that the yield rise from the lows looks very exhausted. Each time stochastics turned lower (see the dotted vertical lines in chart 1) it marked a local high in yields. That doesn't mean we need to re-enter the downward trend but risk/reward looks fairly unfavorable here.

Bottom line, it may be tempting to listen to the sirens calling for higher long-end yields but technicals suggest you better remain strapped to the mast as we are late in the cycle and positioning is extreme in short duration.


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