10 and 2 Year Yields: Levels, Ranges, Targets

The transmission in all market prices in the United States travels from interest rates, to yields, to commodities, to stock markets. Interest rates are the bottommost financial instruments and the transport includes prices to USD/Other Currency. In Europe, yields begin the price transmission to interest rates, commodities and stock markets. European interest rates are middle placed financial instruments and move above and below to assist prices in all European financial instruments. In Europe, yields protect the bottom while interest rates in the United States protect bottoms.
From previous Fed Funds commentary, Fed Funds is not only astronomically overbought but trades around the 9 year monthly average. The 10 year yield at the 2.35 close trades between the 7 and 8 year monthly averages from 2.26 to 2.41. The 2 year yield from its 1.31 close trades between the 11 and 12 year monthly averages from 1.28 to 1.54.
As first warning to the overall structure, an overbought Fed Funds rate contains distinct ability to bring down yield prices. Secondly, the range top locations at 7 – 8, 9, 10 and 11 year averages hardly denotes a further trend higher. Trends in the cycle from 2008 normally begin at the 1 year, higher prices then reverts back towards the 1 year.
The 2 year yield for example at current 1.31 is the result of the drop from 1.40 highs in March. The trend since December 2015 ranged 27 basis points from 1.40 highs to 1.13 lows. The 10 year yield twice attempted to break the 10 year monthly average at 2.68 in December 2015 and March 2016 then reverted to 2.16 in April at the 5 and 6 year average. The overall 47 basis point range since December is located from 2.63 to 2.16.
The 2 year yield below 1.28 at the 11 year average would trade next to the 1 year monthly average at 1.02. Why the 1 year yield derives from a severely misplaced price as the 1 year crossed above every average from 2 to 10 years which translates oppositely as averages 2 to 10 are far below the 1 year.
Averages from 2 to 10 year range from 0.541 lows to 0.934 highs and all are richter scale overbought to include the 1 year. A break at the 11 year at 1.28 would travel next to the 10 year at 0.934 then 2 year at 0.903, 3 year at 0.785 then 9 year at 0.687. Uniformity lacks inside monthly averages.
Averages from 1 to 5 years are not only overbought but Peaks are here as well. Averages 5 to 9 year are fast approaching tops. Deceptive is current yield at 1.31 is comfortable inside its 1.28 to 1.54 range which means neither yield is the current price driver. Higher prices would drive yields lower from lower overbought averages. An event, a news announcement is required to force a break. The best targets are located at 1.14 and 1.04. Trade strategy is sell rallies and don’t expect a 1.54 break.
The 10 year yield from monthly averages 1 to 10 year contains uniformity except for the slight displacement in the 5 and 6 year. Averages range from 2.05 at the 1 year to 2.68 at the 10. All averages lack overbought / oversold status although the metric fails to inform. On the high side on a break at 2.68, prices will severely struggle at 2.80 to 2.90. Why?
The problem with a 2.68 break is maximum peaks in all averages are severe. Prices varied from 3 to 6% on the high side and represents a warning. Any higher in the 10 year yield price falls into the category of pure randomness and an unexplained price. Higher prices is the result of a market reaction rather than meaning, purpose or trend. Best targets are located from 2.68 and 2.75 to 1.85 and 1.78. Don’t expect a 2.68 break.
The 10 to 2 spreads run from 1.40 to 1.23 although both numbers are close yet slightly deceptive due to misplaced and misaligned averages. The current spread runs 1.04 therefore the 1.23 area represents first resistance.
Why low to misplaced averages as well as overbought and peaks in Fed Funds and yields is the result of a lack of deviation in the averages as well as in trade able ranges. The current trade able prices and deviations are out of sync and fails to maintain paces. Consider a drop in GDP saw Fed Funds again close at 0.91, the 2 year yield traded from 1.25 to 1.29 and 10 year from 2.33 to 2.27.
The short rates begin at Fed funds and causes most grief to what should be actual traded levels instead of slight distortions. Basic Taylor Rules informs Fed Funds should trade at least 0.79 while overbought informs much lower. The Fed’s updated 2014 Greenbook on Fed Funds calculates the bottom beginning at 0.45. Factor Inflation, Fed Funds in the 0.50’s is correct.
Where risks to the Fed’s insatiable desire to push Fed Funds higher is timing as well as price locations are seriously off kilter. Higher Fed Funds pushes Yields higher and the economics fails to justify a raise. Raise Fed Funds results in DYY higher and lowers exports which in turn further penalizes GDP and output.


Brian Twomey


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