US 10 Year Yield - Overview.

A couple of weeks ago I posted that we have a Pivotal Week ahead. Over the past two weeks markets have pulled back from the key levels suggested. In light of this retrace I am going to look at US 10 year bond yields, and see whether there any clues as to where this market may head going forward.

The first chart is the Monthly Chart showing the entire downtrend in yields since mid 1980s. I have also highlighted a number of multi-month chart patterns which formed during this downtrend. The most recent pattern I have identified as a possible failed - 'Inverted Head & Shoulders' pattern. If this is indeed correct identification, then this could have strong bearish implications. - I have highlighted a prior similar pattern in 2001/2002.The chart below shows the 2001/2002 pattern in closer detail, together with the current pattern.Other factors remain supportive of the trend of the past several weeks, volume and open interest picked up noticeably during May and early June, and weekly momentum is not suggesting markets are overextended in any way. However, the past two weeks have seen the market pull-back from the yield lows of late May/early June. Below I have re-pasted the chart from 2 weeks ago updated through today. This shows the daily 10 year yield from 2009/2010, it highlights the potential Double top, but also the 2 key horizontal support lines, and the recent consolidation of the past 2 weeks. To summarise the above : Major Multi-year downtrend, with potential monthly Bearish patterns (Failed Inverse Head & Shoulders), potential Double-Top. Recent strong push to lower yields has been supported by increased volume and open-interest, and no conflict with oversold weekly momentum. However, shorter-term key support at 3.05% and 3.17% have held thus far, and this has led to consolidation, which incidentally have eased an oversold daily momentum condition. - In my opinion, the balance of this evidence suggests that the recent consolidation is just that, and that once this phase of consolidation ends , there is a strong risk of yields once again trying to penetrate key support at 3.17% and 3.05%. However, longer or deeper consolidation risk this morphing into a deeper correction, possibly back above 3.70%.

Finally, I have one more chart which is intriguing; I have pasted it below. It is the US 10 Year Yield chart 2001 to present. - Since 2003, around June (usually mid-month) the direction of the yield has sharply reversed the trend of the prior 2/3 months. In all cases the reversal has set a new trend for the next 3/4 months minimum, with the smallest move being 90bps. - This of course may merely be co-incidence, as this pattern does not seem prevalent pre-2003. Another way to read this could however be that yields move sharply lower from June onwards, this has been the case in each of the last four years, and though not shown, has actually been the case in ten of the last thirteen years. Either way, I think the risk is strong in the next 3/4 months of a large move in yields, with the risk favouring the downside. --- Should this happen, it would probably be indicative of strong deflationary pressure. Higher yields on the other than would probably suggest less concern with regard to deflation, rather than inflationary fears, or concerns with regard to US sovereign Debt. IMHO it would probably take yields moving well above 4% to start reflecting this concern.